With funds long close to 200,000 contracts to begin the new week, record yields and a very large harvest just ahead, perhaps it is time for a bit of caution if you are a long, and a chance to unleash some cash soybeans in the weeks ahead if you are a farmer. China has been a major buyer of U.S. soybeans since mid-July, but will the $1.35 rally just since Aug. 10 encourage China to back away? The U.S. does have a price edge over South America, but China has always been a value buyer. Just a word of caution, although one must respect a market that rises on bad news.
December Soybean Meal:
A look at the December soybean meal market reveals a surging market as well. December meal has rallied nearly $42 per ton just since Aug. 10, in lockstep with the soybean market. Since Aug. 11, the funds have reversed course, moving from 30,000 contracts short to 30,000 contracts long meal as of Tuesday, and likely will be over 40,000 contracts long to begin the week. Also, like soybeans, the momentum indicators are reaching into overbought territory, with the RSI above 70 and stochastics at a lofty 95%. A word of caution: Markets can remain overbought or oversold for longer than many expect. However, both the speculative long and the overbought technical indicators suggest caution at these price levels. The market is ripe for a correction. It's not a matter of if, but when, that correction will happen. A few reasons for soybean meal's recent strength is the likelihood of China buying, USDA's 3 million metric ton (mmt) increase in China soybean crush in August and rumors that China could once again be close to removing anti-dumping tariffs on dried distillers grains (DDGs) -- a soybean meal competitor.
The corn futures market has also been on a bullish tear since Aug. 12, when for the third time December corn tested and held what would now be a triple bottom at $3.20. The market has rallied 51 cents from that low as of early Sunday night. With the catastrophic derecho wind event of Aug. 10 and extreme drought hitting key Corn Belt regions, especially eastern Nebraska and western and central Iowa, corn sure had a reason to rally. However, the expectation that yields and harvested acreage would both fall was not the primary reason for the rally since the August WASDE had pegged the corn yield at a record large 181.8 bushels per acre (bpa). The primary reason for the corn surge was the large fund short, which on Aug. 11, was 193,000 contracts, and the huge and unexpected surge in China corn buying. When including some sales to "unknown" (thought to also be China), the U.S. corn sales to China could now be a record of close to 9 mmt (354 mb). The funds since Aug. 11 had not only bought in all of their short, but are now building a net long, which is near 30,000 contracts. On Friday, the September WASDE report lowered corn yield to 178.5 bpa -- a still record-large number and higher than the trade had expected. However, again the corn market rose, closing at its highest level since March. Keep in mind that 2020-21 U.S. corn ending stocks were pegged at 2.5 billion bushel, the largest in over 30 years, but WASDE also pegged the 2020-21 Brazilian corn crop at a record 110 mmt -- with good weather, of course. With the harvest of a 15 billion bushel (bb) crop just ahead, and with both RSI and stochastics also in overbought territory, a corn correction is very possible in coming weeks. As in soybeans, the question remains: How big is China's appetite following catastrophic typhoon-induced flooding there? Perhaps this is only the beginning of demand, but there are many reasons to be cautious in the weeks ahead.
Comments above are for educational purposes and are not meant to be specific trade recommendations. The buying and selling of commodities or commodity futures involves substantial risk and are not suitable for everyone.
Dana Mantini can be reached at Dana.Mantini@dtn.com
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