When Will Range-Bound Soybeans Break Out?

In the grain markets 2013 ended with a whimper and has continued to whimper through January. After a phenomenal harvest in North America, especially after the drought of 2012, both the corn and wheat markets remain mired in long-term bear markets. Soybeans have held on to maintain contact with the teens…more on that later.

Corn, especially, has been grinding lower within a tight range; its average true range on the daily charts has dropped below six cents a bushel. Chicago wheat has lost a dollar per bushel in the past two months thanks to large global stocks and a lack of strong demand. Technically, Chicago wheat is vastly oversold and can’t seem to bounce higher despite the threat of Midwest winterkill and recent purchases from the Middle East and Asia.

Soybeans Avoid the Doom and Gloom

Soybeans have managed to defy gravity, or at least stave off a full-blown bear market. The reasons cited are innumerable, with shear demand for North American soybeans as the prime culprit. Soybean orders for the current marketing year remain far ahead of the USDA estimates and the rates of the recent past. Traders keep expecting to see cancellations with the South American harvest around the corner but that isn’t happening, keeping prices buoyed.

Regardless of the reasons, the price tells the story.

After the front-month soybeans contract touched $14 a bushel during the end of August, it has settled into a dollar range between $13.50 and $12.50 per bushel. The bulls and bears are fighting for control and lately the bears have managed to keep the price below the teens with eyes toward a big South American crop. Recent rains in Argentina have calmed fears about heat-stressed soybeans and initial harvest reports from Brazil are pointing to expectation-beating yields.

The potential symmetrical triangle forming on the weekly soybean chart suggests a breakout coming soon.

The potential symmetrical triangle forming on the weekly soybean chart suggests a breakout coming soon.

Each week I keep thinking soybeans will give way to the 11s, but each week a new bullish storyline emerges, including:

  • The Devaluing of Argentina Pesos: With double-digit percent loses in the currency, Argentinian farmers may be reluctant sell soybeans.
  • Lack of Improved South American Infrastructure: South America has emerged as the world’s top soybeans exporting continent, with Brazil at the top. However, the ability to physically export the increasingly larger crop each year has not kept pace. Last year buyers waited months to get their beans thanks to logistical issues at Brazilian ports. The USDA attaché in Brazil called the logistical improvements “marginal” – not exactly instilling confidence in global soybean buyers.
  • China Using Soybean Import Contracts as Loan Collateral: Due to tightening credit markets in China and the government cracking down on shadowing banking, DTN’s China correspondent Lin Tan, speculates that private companies can gather “credit from the bank much easier by using soybean import contracts as collateral because it’s normal import business.” He estimates that China may cancel 73.5 million bushels worth of soy, but so far that hasn’t materialized.
  • Threat of February Dryness: Although South American growing regions have experienced solid rains lately, there remains risk premium in the market should the weather turn dry.

Despite these recent developments, longer-term data remains bearish. Oil World told Bloomberg World production of soybeans will be 287.8 million tons, up from an estimate in December of 287.6 million tons. Furthermore, the spread Between North and South American soybean prices provides a dollar-per-bushel discount for those buying from Argentina, for example, versus the U.S.

Heading into the next few months, I maintain a bearish bias looking for a downside breakout below the $12.50-60 range. However, should the situation continue to evolve and gain bullish momentum, I’ll be looking to enter above the December highs of $13.50 should we get there.

For now, I will sit tight and wait for the breakout.

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The Top 10 Handles for Grain Futures Trading on Twitter

Want to stay up on real-time news and data for agriculture futures? These 10 pros on Twitter are a great place to start.

10) Angie McGuire (@GoddessofGrain) – The Goddess of Grain is VP of Grains for Citizens LLP and is guaranteed to provide a few chuckles. She mixes in her grain market tweets with plenty of sass and humor. She often has her ear to the ground concerning the rumors and chatter that surround the cash basis for grains, which at times can be useful for tracking price in the futures markets.

9) Agriculture.com (@Agriculturecom) – Agriculture.com is a superb media property for tracking the daily market movements of soybeans, corn and wheat. Its Twitter handle provides a useful method for staying up on the site’s freshest, most important market commentary. They have a reporter on the CBOT floor who provides play-by-play commentary of the action in the pits.

8) Dave Fogel (@ATI_DaveFogel) – David brings nearly 30 years of agriculture risk management experience to his Twitter account and it shows. Based in Bloomington, Ill., he stuffs his Twitter stream with updates on grain basis and insights from across the globe I wouldn’t otherwise know about. His no nonsense approach to Twitter provides breezy, easy-to-understand summaries of what matters most to grain buyers and sellers—vital information for any grain trader.

7) Gavin Maguire (@RtrsAgAnalyst) – Gavin is an agriculture columnist and analyst for Reuters who is a big picture thinker with gorgeous fundamental grain charts to match. For example, for the January 10 USDA report, he posted on Twitter a graph of the daily corn, wheat and soybean markets reactions to the report dating to 1986. That’s great stuff you won’t find easily for free.

6) Julianne Johnston (@julijohnston) – I’ve discovered that grain market analysts are primarily male, but that doesn’t stop Julianne from providing some of the best market commentary and insight around. Working for Pro Farmer, she is always there to provide timely export, cash basis and insights from around the Pro Farmer ecosystem. When its crop report time I make sure to keep close tabs on her handle for updates.

5) Jason Britt (@jasonlbritt) – This broker out of Missouri isn’t afraid to call it likes he sees it, providing an inside look at the psyche of a trader. He also shares the wealth, posting timely articles and keen insights from other industry experts. Topics include the weather and juicy rumors from his network that would be otherwise impossible for outsiders like me to ever hear about.

4) Tregg Cronin (@5thWave_tcronin) – A self-described “futures trader/technician/production ag/Canadian whiskey advocate” from South Dakota, he provides very unique and in-depth analysis of all types of agriculture products from the traditional grains to farmland prices to milk futures. Anyone curious about smaller agricultural markets best pay attention to Tregg’s tweets.

3) Bryce Anderson (@BAndersonDTN) – During the great Midwest drought of 2012, I was glued to Bryce’s Twitter feed. He is the senior agriculture meteorologist for DTN and provides real-time updates on weather patterns and forecasts for the world’s important grain growing regions. He does not tweet every day but when he does Tweet, I never fail to take a look.

2) Darin Newsom (@DarinNewsom) – Based out of Omaha, Nebraska, Darin is arguably the most talented pure writer out there I’ve found covering the grain markets. Equally versed in fundamental and technical analysis, his “technically speaking” blog is can’t miss stuff. From time to time he will also provide insightful technical analysis on outside markets, including oil and gas. Although a lot of his content resides behind a firewall at the DTN Progressive Farmer website, he provides plenty of invaluable information for free via Twitter.

1) Arlan Suderman (@arlanFF101) – When it comes to the grain and cattle markets, Arlan is your guy on Twitter. Not only does he provide superb information on what he is seeing for corn, soybeans, wheat and cattle, he does so seemingly effortlessly and immediately. He is the one I turn to first when the latest USDA report crosses the wire. As a senior market analyst for Water Street Solutions, Arlan is primarily focused on fundamentals and leaves some of the hardcore technical charting to others.

Honorable Mentions

There are way more than 10 great follows on Twitter for grain traders so I encourage you to also check out @IndianaGrainCo, @StandardGrain, @WhiteWheatTweet, @morrisonmkts and @TonyRohrs to name a few more. They all provide great insight into what’s happening in the markets.

Who do you recommend following on Twitter?

I Got a New Job

This week I accepted a new position with an up-and-coming marketing firm here in Portland. I’m excited about the opportunity to grow my communications career, but that also leaves with me with less time to devote to this blog.

The good news is I plan to continue this blog for the foreseeable future. The bad news is I will be unable to continue the current frequency of posts. Therefore, I will discontinue my links post that I produce about three times a week. I really enjoy putting these together but it just won’t be possible to keep them up between commitments to family, my new job and my actual trading.

Going forward I plan to post weekly features focusing on certain markets and/or trends I have been tracking, similar to what I’ve been doing between the links posts. I plan to continue covering diverse markets from natural gas to orange juice and anything that sparks my interest in between.

In short, I hope you keep coming back. It has been a pleasure to share my perspective on futures trading these first three months and I can’t wait to continue the journey.

Happy trading!

Friday Links: Invest in Yourself

End your week with some important financial news content from around the web.

Futures Links

Argentina lifts ban, to allow wheat exports this year (Economist)

The drought intensifies in the American West (WhiteWinterTweet)

North American cocoa grind increases 4.4% in Q4 2013 year-over-year (Reuters)

Is Palladium the metal to rise highest in 2014? (Futures Magazine)

Live cattle continues to push new record highs (Reuters)

Cotton hits five-year high (Agrimoney.com)

Other Fun Stuff

Don’t forget about the role of luck in “creating success” (Oak Tree Capital)

A wife of an American football star left an assault rifle in her rental car…LOL (Fox Sports)

Investing in your “personal capital” (Abnormal Returns)

Cocoa Demand Reports Preview: Buy the Rumor Sell the Fact?

Last week I laid out the bullish case for cocoa in light of an impressive 21 percent run up last year thanks to supply issues and robust demand. Today and tomorrow, data from North America and Europe will help clear up the demand questions from the last quarter of 2013.

The deluge of data begins with the European Cocoa Association releasing measurements on the amount of cocoa beans processed in the fourth quarter 7 a.m. GMT Wednesday. Washington-based National Confectioners Association will follow suit and release its own data at 4 p.m. EST on Thursday for North America.

Analysts across the globe are in agreement that cocoa grindings increased year-over-year last quarter. According to Reuters, analysts polled believe North America cocoa grindings will increase five-to-7.4 percent compared to 2012. Bloomberg conducted its own poll with analysts for the European data and they expect grindings to increase 4.1 percent during the same time period.

The bullish sentiment is justified. Recent headlines from Reuters point to increasing demand. U.S. chocolate sales in October (Halloween candy sales) notched a five percent increase year-over-year versus expectations of one percent. Across the pond, Swiss chocolate maker Lindt & Spruengli published a Q4 sales increase of 8.6 percent thanks to strong North American numbers.

The futures market has taken notice. Today the ICE Cocoa March contract closed up $40 a ton, settling at $2,752, three ticks below the intraday high, after buying picked up just a few hours before the close.

Looking at the cocoa futures chart below, we see a breakout from the ascending wedge pattern (white lines) after the failed bear move to end the year. This move coupled with strong bullish sentiment should keep bears on edge.

The daily front-month ICE cocoa contract

The daily front-month ICE cocoa contract

However, that can all change with some bearish demand data. This might be a “buy the rumor, sell the fact” situation. The cynic in me thinks the run up Tuesday may be part of an insider pump-and-dump scheme, praying upon bullish headlines to lock in prices before an impending crash. The bullish data is probably already priced in. Furthermore, I keep hearing about how cocoa arrivals from the west African harvest are stronger than expected. Once we get through the data this week traders will return their attention to Africa.

Momentum Favors Higher Prices

Regardless of what may happen, I’m taking my chances from the long side. As I described earlier, I examine three main criteria before entering a trade: a technical breakout, fundamental basis and matching sentiment. Thus far we have the bullish technical breakout and the matching bullish sentiment. Now we need confirmation of the bullish fundamental basis.

Should the market sell off following the data release, this may mark a top and I’ll instead be looking to reverse my position and go short. Until then, I remain bullish eyeing a break above the 2013 high set last month.

P.S., if you don’t feel comfortable trading futures contracts, take a look at the iPath cocoa ETFs, including (CHOC) and (NIB) for opportunities to gain exposure.

Please Note: I am currently long ICE Cocoa.

Tuesday Links: The Ultimate Cheat Sheet for Selling Anything

Some items you may find interesting this morning…

Futures Links

Time to buy coffee? Many traders have scalded themselves trying to catch a bull trend (DragonFlyCap)

Fed introducing plans to limit banks’ commodity activities (Bloomberg)

China continues to buy U.S. soybeans despite the looming Brazil harvest (Agriculture.com)

The Vampire Squid calls crop futures a bad bet for 2014 (Agrimoney.com)

WTI crude looking at its worst start to a year since 2009 (Bloomberg)

Sugar stares down a four-year low (Investing.com)

Other Fun Stuff

Did you know that dating to 1990 the S&P 500 has dropped one percent an average of 32 times a year? In 2013 it did so 17 times (Avondale Asset Management)

The ultimate cheat sheet for selling anything (James Altucher)

Monday Links: Controlling Your Investment Lizard Brain

If you only have time to catch one more link fest to start your week, make it this one…

Futures Links

Is gold about to move higher? (TheArmoTrader)

Orange juice wakes up…with a 10-cent move up before a bullish crop report akin to the Duke Bros… (LaCrosse Tribune)

The 2013 Q4 demand data confirms cocoa’s bullish end to the year (Bloomberg)

The USDA on Friday: soybeans neutral, corn bullish, wheat bearish (The Poultry Site)

U.S. wheat export premiums hold steady (Business Recorder)

Other Fun Stuff

Controlling your investment lizard brain (Investing Caffeine)

The average hedge fund is an over-priced index fund (Business Insider)

Game of Thrones returns to HBO April 6! (MSN TV)