Are Soybeans headed to $10?

By | July 21, 2014
  • Fundamentals continue to be strong with solid yield forecasts and large planted acres.
  • Some weather uncertainty creeping into the market.
  • The current bounce looks to be a combination of both technical and weather driven.
  • A period of seasonality approaching that has historically  pushed the market lower.
  • Still more room for managed money to continue to get short.

There’s certainly no shortage of soybeans around at the moment, and things just keep looking better for this year’s crop.

Monday’s crop conditions showed 72% rated good to excellent. The all time highs are 80% and the 10 year average is 60%. So from that standpoint things couldn’t look much better.

Weather has so far been kind to this year’s crop and the outlook remains relatively positive, however a chance of cooler temperatures and additional moisture in the Plains and Midwest regions means some doubt has crept in.

814prcp.new

Fundamentally we are in a strong position, as confirmed by the most recent USDA figures showing excellent yield and planted acreage.

USDA

So what has caused the most recent bounce?

Well weather is certainly a factor as I’ve previously mentioned. A little uncertainty can quickly lead to some short covering.

What is interesting however, is to look at the net long position of managed money and where we stand historically.

Take a quick look at the chart below.

ZS

It’s clear that we have been selling off heavily.

However each time managed money has got down to this kind of level in the last 5 years we’ve had a bounce or a turn around to be more precise. Now that’s not to say that we can’t go lower.

$10.00 would be an obvious target to the downside and with strong fundamentals that looks a real possibility.

The most recent bounce is likely a combination of a few thing including:

  1. An oversold chart
  2. A technical support level
  3. Weather concerns
  4. And managed money being overly short and covering some positions

Soybeans

Looking back over the last 20 years though, we can see that managed money’s net long positions still have some more potential to the drop further.

And given the current growing conditions we have to consider that as a very real possibility.

ZS 20 yrs

There might be just enough wiggle room for managed money to get prices down to $10.00.

We also have to take a look at seasonality. As you can see from the following chart we have a short and sharp seasonal window for the August contract starting on the 20th. However the downward trend begins now as you can see below.

Seasonals

This most recent bounce might present a good chance to get short with the $10.00 target in mind.

However we need to keep a close eye on the weather and just how the recent minor change plays out and how the COT looks in the coming weeks.

In terms of the just what sort of a bounce we’ll see, it’s impossible to know. However the trend is certainly to the downside.

Keep in mind as we approach extreme net long positions there is a high probability of a reversal.

So be wary if the tide begins to turn.

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