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.

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.

The Soybean Dilemma: Beans in the Teens No More?

Despite the third largest North American crop on record and an anticipated strong South American crop, soybeans remain the bullish leader of the grain complex with the January contract hanging around the $13.30 per bushel range. Notwithstanding the yield recovery following the drought last year, soybeans prices have lost just 5.5 percent. In comparison corn has trimmed 40 percent.

‘Beans in the teens’ as the phenomena is often described in trading parlance, usually denotes bullish price action often associated with supply issues and weather scares that push prices to $13 a bushel and higher. This year farmers experienced more favorable weather and a strong bounce in overall yields despite a mid-summer weather scare. The dry August added risk premium to the market and sent the front-month contract price of $11.65 in August to a high of $14.09 per bushel a month later. In the end, the dryness had limited influence on the crops and prices drifted lower into the fall.

The trend turned bullish again after the WASDE report on November 8. Soybeans shot up 30 cents in one day despite the fact the department raised its average yield-per-acre estimate 1.8 bushels above its September guess. The one percent decrease in total acres harvested offset the gain in yields, generating what many analysts called a neutral report. In hindsight, that report was bullish as the USDA appeared to massively underestimate demand.

China’s Insatiable Appetite for Soybeans

Despite the fantastic harvest in the Midwest, prices remain elevated and industry insiders point to China. Unlike corn or wheat, there are few sources for soybean exports. The U.S., Argentina and Brazil provide the vast majority of the world’s supply. Watching a rapidly depleting pile of soybeans available in the U.S., the Chinese are either unwilling or unable to curb purchases until the South American crop details emerge.

Grain analyst Dave Norris thinks China isn’t taking chances for fear of a delayed crop in South America and logistical problems exporting beans from the continent. After the last harvest, ships waited as long a month to pick up shipments in Brazil ports. Norris told Bloomberg that sales and shipments since the marketing year began September 1 totaled 36.79 million tons, 93 percent of the total the USDA expects to export in the full season.

The reality is China may not have a choice. The Chinese middle class is larger than the entire population of the U.S., and as China continues to grow its economy the average citizen can afford to eat more protein. China must continue to import record amounts of grain to match the rising affluence of its populous.

 

Brazil ports lack the infrastructure to match export demand

Will Prices Finally Fall?

Should the South American crop grow as planned, the increased supply may finally squelch the record demand. Societe Generale (SocGen) and broker RJ O’Brien told Agrimoney.com that the high soybean prices relative to corn will push South American farmers to take away corn acres and plant more beans. By June, SocGen predicts soybeans prices will hit $11.50.

I am not in the prediction game, but for prices to fall significantly, a lot must go right in South America this growing season. The fall harvest in North America went as well as one could hope for yet we still have beans in the teens.

For the bears, they can take solace in contango. Today, the market believes future soybean prices will dip below $13 when the May contract comes off the board. Keep an eye on spreads as we close in on the next South American harvest for clues on the market’s direction.

Coffee Consolidates; Where will it Go Next?

A few weeks ago I made a bullish case for Arabica coffee based solely on the technical aspects of this particular market. From a fundamental perspective, Arabica coffee remains decidedly bearish. Despite devastating flooding in Vietnam this past weekend, which mostly affected Robusta coffee plantations, it does not have any obviously bullish tailwinds.

The market sentiment was best summed up in Bloomberg last week by a broker in Brazil:

“There’s so much coffee around, all over, that it will take at least one year and a half for supplies to diminish and prices to start rebounding,” said Roberto Higgins, a director at Guide Investimentos SA Corretora de Valores, a broker in Sao Paulo. “There’s nothing bullish in this market.”

Despite the bears, the market may be setting up for a bullish breakout this week.

On the daily chart $KC_F the front-month coffee contract has consolidated after touching a low of around $1 per pound hit on November 7, bouncing between multi-year support and resistance at $1.06.

In the March 2014 contract, prices appear more bullish. Holding a premium of about four to five cents above the December contract, March registered a new November high close at $1.0955 today, briefly touching above $1.10.

If the March contract can extend its winning streak and close above resistance at $1.10, the market may attract more technical buying and short covering, propelling the market into the teens. A failed breakout will allow the market to test the multi-year low set a few weeks prior.

March Arabica coffee consolidating near multi-year lows

I’m betting that the market will break out this week, but I’m not confident, as an increase in volume has not accompanied the two-day rise. Midweek is looking like a make-or-break period for coffee prices.

Full Disclosure: I’m long coffee.

Previously: Coffee Futures Losing Streak Hits Nine Months and Counting