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(June 11, 1997) SOYBEANS: When the world's largest exporter of beans decides to import them, is that bullish or bearish? The market over the last few days has taken a decidedly bearish tack on that point, while I suspect that the resulting low prices will actually lead to an even greater rate of consumption. Now, you've seen it all, someone has taken new lows and arrived at a bullish formula. I wrote that to underscore the reason why the volatility is so extreme. and why follow-through seems to be a thing of the past...for now. Don't forget about last year's grain markets, which were driven by China's similar action in corn. The second largest exporter became an importer, and we scored new historic highs in corn. Cargil did confirm that they were shipping in beans from Brazil. Brazil has already contracted for shipment of beans later in the year, so their supplies, already tight, are anticipated to be filled by our new crop. Sounds like some sort of Ponzi scheme, doesn't it? If the beans are not there, you can bet it is, and much higher prices may occur. The 40-cent premium of July beans to August beans is very unusual and points to extremely tight supplies and strong demand. The rate of crush and exports are both very important to the path that beans will take, unless there is a weather problem, in which case expect a very brisk move higher.
Since we're just now entering the period of hot and/or dry weather, it isn't out of the question to suspect the potential for much higher prices I wouldn't be surprised to see this bean move continue through the rest of the summer until such time as we know the new crop is made. Speaking of which, November beans have little weather premium, and may represent an outstanding buy.
RECOMMENDATION--Option traders should buy July, August and November bean calls at current levels. Aggressive futures traders should continue to buy November beans at current levels. Since beans could easily trade much higher if the weather or usage becomes an issue, traders should give this serious thought. July options are now in cheap shot territory, so traders should consider calls at current levels or on any breaks. Longer-term traders should consider the long side of August beans at current levels or on 5-10 cent dips with stops of 10 or so cents or under 744. August beans have support near 744-747.
M. Steven Morgan
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