The USDA released their monthly World Agricultural Supply and Demand Estimates (WASDE) Report on Tuesday. It showed world stockpiles of soybeans down a massive 77% from the 2019/2020 crop year – the lowest since 2013/2014. The reaction to this report should have been resoundingly positive. It wasn’t. “Beans” sold off hard after the report, declining 48 cents on Wednesday.
One of the most valuable signals of underlying change in a market’s trend is its reaction to news. A big rally following “bad news” can be a sign that the worst has already been discounted by the market. The rally following an extremely bearish WASDE report last August confirmed the bullish posture in soybeans we’d taken (early as it turned out) in May. A sharp decline following “good news” can indicate a scenario in which the best outcome has already been priced into the market. We believe this may be happening now.
Date Source: Reuters/Datastream
Supplies are tight, but the South American harvest will soon be underway, bringing with it more two-way volatility. We expect North American farmers will grow increasing eager to “market” next year’s crop, hedging their expected planting by taking bearish positions in the futures and futures option markets once the current rally shows more signs of faltering. They will join South American producers eager to do the same thing with their harvest. There is also the possibility that the South American crop may not be as lean as expected. Some analysts are predicting a decent harvest despite recent weather issues.
Soybeans have rallied in an almost straight line since August’s bearish USDA report (as the chart above illustrates). Beans are overbought and vulnerable to sharp, corrective declines similar to the one that defined the market back in the summer of 2016. While we do not expect soybeans to give back all of their recent gains, we would not be surprised to see a decline that could retrace 50% of the current rally. Our downside target is $11.50 per bushel.
RMB trading customers may want to consider an aggressive contrarian position in soybeans by purchasing May 2021 $12.50 put options for $500 or less. Look for an overdue correction in soybeans prior to option expiration on April 23, 2021. This option will be worth at least $5,000 should the May futures hit our $11.50 per bushel target, at or prior to this date. Your maximum risk is the amount paid for your put(s) plus transaction costs.
Please be advised that you need a futures account to trade the markets in this post. The RMB Group has been helping our clientele trade futures and options since 1991. RMB Group brokers are familiar with the option strategies described in this report. Call us toll-free at 800-345-7026 or 312-373-4970 (direct) for more information and/or to open a trading account. Or visit our website at www.rmbgroup.com. Want to know more about trading futures and options? Download our FREE Report, the RMB Group “Short Course in Futures and Options.”
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