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Despite what most analysts would call a tight supply and demand scenario, soybean futures for November delivery have leaked lower over the past several weeks. Chinese demand has continued to run rampant, however the possibility of record yields in the US along with ideas of a massive increase in South American acreage have kept prices on the defensive. In general, soybeans will put in a seasonal "harvest low" at some point in the October/November timeframe as farmers sell out of the field and empty bins. Since harvest is delayed 3-4 weeks in many areas of the country, it may be possible that the lows will come later than usual.
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In terms of historical norms, $9+ soybeans are overpriced at harvest. In fact, beans have finished the month of October below the $8 mark in 7 out of the last 10 years. The chart below illustrates why traders may want to avoid being long the bean market as fall begins.
Soybeans, Monthly Continuation
 If you cannot view the Soybeans chart,
go here.
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Aside from having a bearish outlook on beans simply because of seasonal trends, we've also taken a close look at the relationship between soybeans and corn. The ratio for corn to soybeans as far as prices are concerned is historically about 2.4 to 1. Currently, the radio between December corn and November soybeans is near 2.8 to 1, implying that beans are overvalued relative to corn when compared with historical averages. Without getting into corn market fundamentals, it would make sense for beans to come down in sympathy with corn over the course of the next several weeks.
Dec '09 Corn (blue) VS. Nov '09 Beans (red) If you cannot view the Corn vs. Soybeans chart,
go here.
We believe that November soybeans can move towards the $8-$8.50 area over the course of the next several weeks. Below are a couple of different trade ideas that can help a trader capitalize on the potential break with a limited risk. Traders should continue to keep an eye on USDA reports as well as yield estimates.
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Buy the December 900 PUT option for near 30 cents; Dec options trade off the January futures contract
- Sell November Soybeans at 9.50; Stop orders should be placed at 9.75; Profit target at 8.75
Futures and options trading involves risk of loss and is not suitable for everyone.
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About the Author
Joseph Vaclavik
is a futures and options broker at MF Global in Chicago. He is co-founder of Advantage Grain, a specialized division of MF Global specializing in the grain and livestock markets. Joe has an extensive knowledge of grain market fundamentals through his extensive work with grain and livestock producers across North America. He has been a featured analyst on US Farm Report, Ag Day TV, Bloomberg News, Investopedia.com and W-ILL Radio along with several other online publications. Joe can be reached directly at
jvaclavik@mfglobal.com or (877) 310-5643. |
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