Receive a 30-day complimentary trial to grain and livestock research.

The grain research is published daily by the research staff at ADMIS. The livestock research is prepared daily by Dennis Smith and includes a fundamental and technical discussion of the hog and cattle markets. The report includes specific trading recommendations including outright positions and spread trading ideas. Email or call Dennis at 1.877.377.7905 or dennis.smith@archerfinancials.com.

Recently gold prices have rallied to 33-year highs. The action in the gold has many traders looking for the next "big move" in commodities. Soybeans could be one of those markets ready for a major move upward. 

Soybean futures have established a strong up trend with recent prices testing the major highs established in the spring of 2004. It appears the fundamental landscape is in place to sponsor a move into all-time highs over the course of the next year. The USDA issued a monthly supply/demand report on Friday, November 9th showing a tightening ending stock situation as we approach next year’s growing season. Uncertainty surrounding production in South America, the number of U.S. acres devoted to soybean production next spring, expanding demand for soybean oil, high soybean meal usage, and the future direction of the U.S dollar and its impact on soybean exports represent some of the major fundamental factors at work. 

The USDA, in their November report has pegged the average soybean yield at 41.3 bushels per acre, down slightly from their estimate in October and below the 2006 yield of 42.7. The big change this year in the soybean market was the dramatic drop off in planted acres, mostly due to massive expansion of acreage devoted to corn production. Soybean planted acreage this year, at 63.7 million acres, was down 15% from last year’s acreage of 75.5 million. With this year’s yield down from last year, the resulting crop of 2.594 billion bushels is down 19% from last year’s production figure of 3.188 billion.

While the supply side of the soybean market is friendly, bullish trends on the demand side of the ledger appear capable of "throwing gas on the fire". The soybean crush for this year is projected at 1.825 billion bushels, up slightly (up 1%) from last year’s crush measured at 1.806. Projected exports at 975 million bushels are down 13% from last year. However, current trends in soybean exports indicate the USDA may be too low in their projection. For example, while soybean inspections for export are down 23% from this time last year, current soybean export sales are up 3%. Thus, total soybean export commitments are down only 9% from this time last year. The strong crush demand for soybeans is being fueled by the trends in biodiesel production and large feeding demand as a result from record large pork production and large poultry production. The strong export demand for U.S. soybeans is being fueled by the weakness in the U.S. dollar. The dollar has declined to its lowest level on record against most other currencies. 

As penciled by the USDA, soybean ending stocks for next year are projected at just 210 million bushel. That’s less than half of this year’s ending stock figure of 573 million. Projected world ending stock levels are declining with USDA’s latest projection at 49.35 million tones, down from their October projection of 50.75 and substantially below 2006/07 world ending stocks of 62.08 million tones. The soybean supply situation is pretty well set in stone for the next several months. U.S. production numbers will change very little from the November figures and South American production won’t be available to the world market until March at the earliest. Of course, planted acreage in South America and weather developments during their growing season will provide input for market price movement this winter.

Another factor supporting soybean prices are concerns by the Chinese government in fighting food price inflation. The Chinese are in the process of rebuilding their hog herd which as hit by a one-two punch last year. Disease problems and high feed costs forced thousands of Chinese hog producers to exit the business of raising pork. The Chinese government has indicated it is "fully committed" to controlling food price inflation. They will assure an adequate feed supply and outlined a host of incentives to get producers back into pork production. The Chinese will likely be aggressive buyers of U.S. soybeans and soybean meal over the next year. Recently, soybean prices in China have been trading at record high levels. The Argentina government is also concerned about inflation. Recently, they have slapped an export tariff on their soybeans in an effort to keep domestic supplies from dwindling and prices rising. The net result is fewer soybeans available to the world market resulting in higher prices.

Looking at the January soybean chart, futures have established an impressive up trend, finishing at contract highs following the November supply/demand report. January futures staged a $2.13 rally from their August lows to the September highs. Using a similar measurement from the October low, an equal leg up projects an upward target in January soybeans at $11.53. The old highs at $1032 should now be support. Thus, traders may want to consider entering long positions in the $1025 to $1030 price range, and be willing to risk the position to just below $1000. If this represents too much risk, consider one or two of the mini sized soybean contracts which represent 1,000 bushels, or one fifth the size of a regular contract. A reasonable upside objective on this leg up would be in the $1140 to $1150 price range. 

Another way to approach the soybean market from a long term perspective is to enter into the long July short November 2008 spread. This spread has moved from July soybeans 25 cents premium to the November (in early September) to 90 cents premium in early November. Consider buying the spread in the 70 to 75 cent premium area, risking no more than 25 cents on the spread. Approaching next spring, uncertainty regarding planted soybean acreage and the weather pattern during the U.S. growing season could drive this spread toward $1.50 to as much as $1.70 premium. 

In response to the title of this article, yes, I believe that soybeans are "good as gold".

Receive a 30-day complimentary trial to grain and livestock research.

The grain research is published daily by the research staff at ADMIS. The livestock research is prepared daily by Dennis Smith and includes a fundamental and technical discussion of the hog and cattle markets. The report includes specific trading recommendations including outright positions and spread trading ideas. Email or call Dennis at 1.877.377.7905 or dennis.smith@archerfinancials.com.