Soybean prices have been on a rollercoaster fuelled by turbulence over the last month amid elevated weather concerns, changing production yields, and geopolitical upheavals affecting prices. Winters are vital for bean traders. This paper delves into the various forces at play to guide traders and portfolio managers to navigate through the rough weather.
Favourable weather combined tail winds for Soybean harvests plus weakness in destination markets are setting the ground for bearishness in bean prices. A short position in CME Soybean futures can be used to manage risk.
US SOYBEAN HARVEST RESULTS
Soybean harvest in the US has concluded providing a more certain supply outlook for the ongoing marketing year. Next Soybean harvest will take place in March-June in South America. Until then, current inventories will have to meet the demand.
As per USDA update, Soy harvesting in the US is 90% complete. Yields for the 2023/2024 marketing year were updated to 49.9 bushels/acre in the November WASDE report compared to 49.6 bushels/acre in the October report.
This resulted in an upward revision to the production and ending stocks figures as well since the consumption forecast remained unchanged. A similar update was reported by USDA in the global soybean outlook which suggested that global soybean production would be marginally higher.
Despite the upward revisions, the US production figures represent a YoY decline of 4 million MT (-3.3%). The upward revision then, provides a larger buffer to account for potentially higher consumption.
This is vital because bean inventory balances in the US this year are tighter than the previous two years. US Ending stocks are forecast to be 6.68 million MT compared to 7.3 million MT last year.
As a result, although the upward revision expanded the buffer, it is quite narrow which could exacerbate a shortage in case consumption edges higher.
SEASONAL TRENDS
As highlighted by Mint in a previous paper, seasonal trends in Soybean futures are affected by harvest. During harvest, prices decline before recovering post-harvest as inventories are depleted. However, the seasonal trend is distinct during El Niño years where returns underperform the usual average, especially in December-January.
BRAZIL WEATHER CONCERNS LIFTED
Soybean markets are heavily influenced by weather in Brazil. Hotter than expected weather and erratic precipitation raised concerns for Brazilian crops which drove Soybean prices higher over the past month.
Brazil experienced a strong heat wave last month which has a negative effect on crops. Weather effects on crop yields are most pronounced during the early stages of growth.
However, weather is now set to improve as weather forecasts suggest the arrival of rains and milder temperatures ahead. Both are positive for the bean crop.
Still, higher-than-expected precipitation remains a concern for the crop. As highlighted by University of Delaware, too much rainfall during the planting stage can lead to significant yield reduction.
Brazil is the largest producer of Soybean and its harvest had been expanding rapidly over the past three years. This had previously led to oversupply concerns in global markets, exacerbated by a low demand environment in the largest soybean consumer China.
Though consumption in China is forecast to increase YoY, it will not be enough to match the increase in global production (especially in Brazil) per the latest WASDE estimates. Net effect is larger ending stocks globally which is bearish for Soybean prices.
EL NIÑO UPDATE
In this El Niño year, unexpected weather pose significant concerns as it deviates from the anticipated impact on soybean crops outlined in our previous paper. While El Niño typically brings favourable conditions, such as increased rainfall and mild weather leading to a 3.5% higher soybean yield on average.
Brazil is experiencing unexpectedly warm weather and low precipitation, diverging from the usual patterns. The unpredictability of these conditions amplifies their potential impact on prices compared to previously expected El Niño effects.
El Niño continues to evolve adversely as Oceanic Niño Index (ONI) has reached its highest level since 2016. Sea Surface Temperatures (SST) at Niño 3.4 is another indicator that has reached an all-time-high.
SIGNAL FROM SOYBEAN FUTURES MARKET
Technical signals suggest a bearish trend in bean futures. Front month bean contract was on an upward trend since mid-October. The front month contract tested but failed to pass a key pivot resistance level of 1,381 USc/bushel. Price has since declined 5% and points to a reversal as the Moving Averages close to forming a bearish crossover.
Asset managers switched from net short to net long positioning over the past month. However, over the last 2 weeks, asset managers have reduced net long positioning by 20k contracts.
Options markets point to bearishness as participants are positioned for Soybean price to decline with a P/C ratio of 1.31 which suggests more bearish bets than bullish ones.
Further, bearish bets have increased sharply over the past week with the largest increase in puts on the April monthly contract and December monthly contract. Moreover, participants have reduced call OI on the front-month December contract.
HYPOTHETICAL TRADE SETUP
With the overhang of negative weather in Brazil lifted, bean prices are likely to decline and pare gains from the past month due to a weak demand environment. Market metrics also suggest a bearish trend. To gain exposure, investors can deploy a short position on Soybean futures expiring in Feb (ZSH2024).
CME Soybean futures expiring in March require a maintenance margin of USD 2,800 (as of December 4th) and provide exposure to 5000 bushels.
Entry: USc 1,336
Target: USc 1,272.25
Stop Loss: USc 1,381
Profit at Target: USD 3,187
Loss at Stop: USD 2,250
Reward/Risk: 1.42x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Favourable weather combined tail winds for Soybean harvests plus weakness in destination markets are setting the ground for bearishness in bean prices. A short position in CME Soybean futures can be used to manage risk.
US SOYBEAN HARVEST RESULTS
Soybean harvest in the US has concluded providing a more certain supply outlook for the ongoing marketing year. Next Soybean harvest will take place in March-June in South America. Until then, current inventories will have to meet the demand.
As per USDA update, Soy harvesting in the US is 90% complete. Yields for the 2023/2024 marketing year were updated to 49.9 bushels/acre in the November WASDE report compared to 49.6 bushels/acre in the October report.
This resulted in an upward revision to the production and ending stocks figures as well since the consumption forecast remained unchanged. A similar update was reported by USDA in the global soybean outlook which suggested that global soybean production would be marginally higher.
Despite the upward revisions, the US production figures represent a YoY decline of 4 million MT (-3.3%). The upward revision then, provides a larger buffer to account for potentially higher consumption.
This is vital because bean inventory balances in the US this year are tighter than the previous two years. US Ending stocks are forecast to be 6.68 million MT compared to 7.3 million MT last year.
As a result, although the upward revision expanded the buffer, it is quite narrow which could exacerbate a shortage in case consumption edges higher.
SEASONAL TRENDS
As highlighted by Mint in a previous paper, seasonal trends in Soybean futures are affected by harvest. During harvest, prices decline before recovering post-harvest as inventories are depleted. However, the seasonal trend is distinct during El Niño years where returns underperform the usual average, especially in December-January.
BRAZIL WEATHER CONCERNS LIFTED
Soybean markets are heavily influenced by weather in Brazil. Hotter than expected weather and erratic precipitation raised concerns for Brazilian crops which drove Soybean prices higher over the past month.
Brazil experienced a strong heat wave last month which has a negative effect on crops. Weather effects on crop yields are most pronounced during the early stages of growth.
However, weather is now set to improve as weather forecasts suggest the arrival of rains and milder temperatures ahead. Both are positive for the bean crop.
Still, higher-than-expected precipitation remains a concern for the crop. As highlighted by University of Delaware, too much rainfall during the planting stage can lead to significant yield reduction.
Source: USDA
Brazil is the largest producer of Soybean and its harvest had been expanding rapidly over the past three years. This had previously led to oversupply concerns in global markets, exacerbated by a low demand environment in the largest soybean consumer China.
Though consumption in China is forecast to increase YoY, it will not be enough to match the increase in global production (especially in Brazil) per the latest WASDE estimates. Net effect is larger ending stocks globally which is bearish for Soybean prices.
EL NIÑO UPDATE
In this El Niño year, unexpected weather pose significant concerns as it deviates from the anticipated impact on soybean crops outlined in our previous paper. While El Niño typically brings favourable conditions, such as increased rainfall and mild weather leading to a 3.5% higher soybean yield on average.
Brazil is experiencing unexpectedly warm weather and low precipitation, diverging from the usual patterns. The unpredictability of these conditions amplifies their potential impact on prices compared to previously expected El Niño effects.
Source - NOAA
El Niño continues to evolve adversely as Oceanic Niño Index (ONI) has reached its highest level since 2016. Sea Surface Temperatures (SST) at Niño 3.4 is another indicator that has reached an all-time-high.
Source - NOAA
SIGNAL FROM SOYBEAN FUTURES MARKET
Technical signals suggest a bearish trend in bean futures. Front month bean contract was on an upward trend since mid-October. The front month contract tested but failed to pass a key pivot resistance level of 1,381 USc/bushel. Price has since declined 5% and points to a reversal as the Moving Averages close to forming a bearish crossover.
Asset managers switched from net short to net long positioning over the past month. However, over the last 2 weeks, asset managers have reduced net long positioning by 20k contracts.
Options markets point to bearishness as participants are positioned for Soybean price to decline with a P/C ratio of 1.31 which suggests more bearish bets than bullish ones.
Further, bearish bets have increased sharply over the past week with the largest increase in puts on the April monthly contract and December monthly contract. Moreover, participants have reduced call OI on the front-month December contract.
HYPOTHETICAL TRADE SETUP
With the overhang of negative weather in Brazil lifted, bean prices are likely to decline and pare gains from the past month due to a weak demand environment. Market metrics also suggest a bearish trend. To gain exposure, investors can deploy a short position on Soybean futures expiring in Feb (ZSH2024).
CME Soybean futures expiring in March require a maintenance margin of USD 2,800 (as of December 4th) and provide exposure to 5000 bushels.
Entry: USc 1,336
Target: USc 1,272.25
Stop Loss: USc 1,381
Profit at Target: USD 3,187
Loss at Stop: USD 2,250
Reward/Risk: 1.42x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Full Disclaimer - linktr.ee/mintfinance
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