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(August 20, 1997) SOYBEANS: Disappointment that the crop had not improved more supported the beans this week. Support also came from ideas that the cool weather that is currently forecast will slow the maturation at the same time as leaving them open to frost damage. Cool wet weather also hinders oil production. The tight supply of beans is also supportive. When August goes off the board later this week, the lead month will be September. August beans closed at approximately 779, September 654, November 619. This inversion alone tells you there is strong cash demand, and is suggestive of higher prices. The hazard to higher prices on that account is either a drop in exports or the availability of early new-crop beans. September beans could be a strong buy for the aggressive trader. There is a seasonal for beans to trade higher from mid August to early September. The early frost story is starting to surface in earnest now. Some traders do not believe that beans can seriously go down as long as the threat of frost remains. I would also expect the market to sit up and take notice whenever exports are announced. Current bean supplies come in around 125 million bushels, the lowest in 20 years. Some analysts believe that September usage could be 120 million bushels. In a serious addition to this story, Safras, the private Brazilian forecasting firm, came out with an eye opening report. Brazil may not be able to meet their commitments for exports or crush. Stocks were 9.25 million tonnes on August 1, down 15% from last year, and ending stocks are projected to be a deficit of 454,000 tonnes. The reason is reportedly Brazil's export policy. They've exported 127% over the same time last year. In order to reduce the deficit, they either need to import substantial amounts of beans, presumably from the U.S. as Argentina has no beans, or wholesale export cancellations will have to take place. While future prices still remain an issue, this report underscores the intense world demand. Traders should continue to focus on the potential upside in beans. Is there a hazard here? World usage could suddenly fall, which is unlikely, world crops could improve, always a possibility, or the U.S. crop could come in even larger than expected, which conceivably could happen if we have a mild fall. Double-crop beans and later variety beans that are at risk could yield to their full potential. In any event, unless there is a problem, it is not uncommon to see weakness into harvest. However, problems do occur, both here and abroad, so traders would do well to keep this on their watch list. A major weather forecaster has also come out with a long-term forecast, based at least in part on El Nino, that suggests that next year could be similar to 1988, a serious drought year when beans went to nearly 11.00. 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. It was reported that monsoon activity in India has begun to wane, which is very unusual at this time. According to one widely followed meteorologist, this could be the beginning of the end of the monsoon season. This could be a big problem, as India is the largest producer and consumer of edible oils and meals. It could also be a big opportunity for bean oil bulls. 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. However, long-term traders should take note of oil's relative low price and volatility, and consider buying December or March futures or calls at current levels. The funds are already buying.
RECOMMENDATION–Aggressive traders should buy December or March bean oil at current levels or if more conservative on 20-30 point pullbacks. Use stops under 2170 or of 50-100 points. Option traders should buy March or December near the money calls. Objective is open. Support basis November beans remains near 610, 605, 597-594 and near 585. Resistance is near 626, 642-644, 652-655, 662-665, and near 680. Traders should begin to shift to a two-sided strategy. Buy November futures in the 610 area or on 10-15 cent breaks with stops under 602, 593 or of 5-10 cents, and/or sell November beans on rallies to the mid-upper 620's with 5-10 cent stops or over 644. Longer-term or more conservative traders might buy a dip into the mid-upper 590's with stops under 593 or of 10 cents or so. Objective is open. If an aggressive trader, contemplate selling November beans on rallies to the low 640's. Use stops over 653 or of 5-10 cents. Conservative traders should buy March calls for the long haul. As is the case with the corn, there may be more to this market than anyone suspects. I don't make a practice of recommending way out of the money calls, but perhaps they could be viewed as a cheap long shot at this time. More experienced option traders could buy March or May calls, and sell November or January calls to pay for the time premium.
M. Steven Morgan
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