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(August 14, 1997) SOYBEANS: Poor export numbers but August beans still managed to close higher on the day. Basis levels at the Gulf and in Iowa, Indiana and Illinois locations remain very strong. Basis, for those new to the term, is the difference plus or minus between local cash prices and what is quoted on the board. It is not uncommon to see strong basis levels near the Ohio or Mississippi Rivers or the Gulf. This is due at least in part to the lack of transport costs involved. Current weather forecasts call for below normal temps and above normal precip. The weather maps I've been watching show the precip missing the problem areas, but still, rain is negative. If the Illinois problems become critical, the market will respond. Current weather is near ideal, and could press the beans. There is a forecast for a freeze or frost in Canada this weekend. This could impact the wheat and the canola crop, which is a direct competitor of soybeans, and if it occurs, should provide support to beans. The new 30-day U.S. forecast will also be released this weekend. Could it too call for unseasonably cold weather? There is talk that a cool wet fall could hurt the oil yield in beans. Bean stocks are in the neighborhood of 125 million bushels, one of the lowest levels in history. Some analysts believe that September usage could be 120 million bushels. August beans are considerably over September and November. This inversion alone tells you there is strong cash demand, and is suggestive of higher prices. Aggressive traders might keep an eye on the September beans as a strong buy. A hazard is the potential for early beans from the south being available as September rolls around. There have been reports that India's monsoon season has been a bit drier than normal. If this becomes a problem, it is a big problem, as India is the largest producer and consumer of edible oils and meals. They are also a large wheat producer. Yesterday's forecast of 2744 million bushels was larger than most guesses, and above the average guess. Some analysts I've read are suggesting that beans will go back down to the 577 low. As I mentioned before, it is likely that this report will be the largest of the year. Weather over the last couple weeks may have reduced yields, and we still have weather in front of us to face. Pretty soon, the early frost story will begin making the rounds. Beans. like wheat, (remember the Kansas freeze?) are relatively tough plants. If there is a frost, it impacts the bean oil the most, turning it green, and therefore unusable in many applications. How about army surplus margarine? In any event, a frost can be harmful, but that is usually not the case. Grains and oilseeds that are grown the world over are not “hot house flowers.” They're tough. Another factor that will soon be an issue is rain during harvest, which is supportive. I've mentioned this before, but soybean oil may be the big sleeper here. If El Nino becomes a problem, and Southeast Asia is dry, edible oil production could suffer dramatically. As they are major consumers, there could be solid upside. Long-term traders should take note of oil's relative low price and volatility, and consider buying December or March futures or calls on this break.
RECOMMENDATION–Today's action was moderately constructive, with beans testing and holding support. Conservative traders should buy calls for the long haul. Support basis November remains near 610, 605, 597-594 and near 585. Resistance is near 626, 642-644, 652-655, 662-665, and near 680. The low 660's may be difficult to penetrate and maintain unless weather is a distinct problem or bean stocks are perceived as critically low. Buy November futures in the 610 area or on 10-15 cent breaks with stops under 593 or of 5-10 cents. Objective is open. If an aggressive short-term trader, contemplate selling November beans on rallies to the low 640's. Use stops over 653 or of 5-10 cents. However, most traders should stay with the long side of the market, looking for new highs. As is the case with the corn, there may be more to this market than anyone suspects.
M. Steven Morgan
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