11-16-2011: December Soybean Meal: Waiting on China or South America?
From the stereotypes and pictures above one might initially get the impression that soybean meal, which is used primarily for animal feed, has as its best customers horse-lovers. Or perhaps, feeding cattle would be considered the most popular use. However, it turns out that it is feed for poultry that is the main use for soybean meal.
Our intuitive feeling when we started this review was that soybean meal had taken such a hit (see point and figure chart) especially for those who had been holding long positions and rolling forward, that it was due for a bounce upward. However, looking at the historical chart, we see soybean meal has the potential to go much lower. Traders are waiting on the Chinese to step up import orders as the principal reason for optimism. The Chinese do have a very big impact in commodities markets, but so also do weather conditions in grain futures, and in this case especially in South America. Juxtaposing one against the other, we tend to favor an upcoming abundance of supply over demand.
We fed soybean meal, soybeans, and corn into a neural network to get the following result:
December Soybean Meal:
December Soybean Meal:
While a stronger U.S. Dollar is deemed negative for most grains, they pushed higher even with this condition. There is a perception China will be a much more important importer than was formerly concluded. Estimates of their imports of soy complex material were raised from 56.5 million tonnes to 58-61 million tonnes by the USDA. 96% of the soybean crop has been harvested compared to 99% last year and 92% last week. The 10-year average at this time is only 93%. Soybeans crushed for the previous month came in at 141.179 million bushels, about 1 million bushels below trade expectations. Weekly export inspections came in at 53.5 million bushels above trade expectations, with 35.2 million bushels going to China. Cumulative shipments reached 23.8% for the season as compared to a five-year average of 27.1%. Rainy weather forecast for Brazil and Argentina is a negative factor which will help those countries' farmers finish their planting. An excellent start in South America may limit any upward bounces. The EU's total grain crop for this season is expected to reach 282.5 million metric tonnes, well above expectations. The main support for the soybean complex is optimism related to China's import needs. China could go to South America rather than the U.S. to meet those needs. World demand for soybean meal may be resurfacing, but the fact remains that outside forces are generally considered negative for this market. Still, soybean meal has slid to recent lows makingit more attractive pricewise to buy. A possible La Nina weather condition which could promote dryness in South American regions is a concern for short sellers. The soybean market in general has moved to a slow pace finish in a post harvest environment. It is harder for trades to get excited about price potentials in such a market. Pricier corn has helped soybean meal compete in feed costs, but recent improvement in U.S. crops could limit meal's potential to advance further.
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The above point-and-figure chart is giving a conventional sell signal.
We are headed toward a cyclical low and a seasonal up period.
Our best-performing internal program is "Commodit." It comes bundled in with a Winters Time Series Forecast. It is giving a sell signal.
Results of "Commodit" for Soybean Meal (blue lines = successful trades, red, unsuccessful): (Always in the market.)
Our third system has just triggered a buy signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $100. Initial margin on a single contract is $2,700. Use of options is advised.
Scale traders are not a factor in this price range.
In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-short.
The average volatility shown below suggests that a major change in direction to up is imminent at a volatility low point.
Our option trade recommendation is to Sell the Soybean Meal March 320 Call @ 8.20 or better.
What the Dec. - Mar. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down. The best time to enter or leave the above spread is when it is at -4.40 or narrower buying the far as prices are falling and then selling the near, and exiting or entering when it is at -6.80 or wider sellling the far as prices are rising and then buying the near.
Here's an intraday chart for the previous day ( 11/14 ).
Risk Versus Opportunity Report
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SMZ1 December Soybean Meal
High Price: 312.6
Current Price: 301.4
Low Price: 278.6
Risk: -0.076
Opportunity: -0.154
(O/R) Ratio = 2.036
| Factors | Weighted Points |
|---|---|
| Inter-Market Analysis | - 1 |
| Parabolic Chart | - 1 |
| Nirvana Chart | + 1 |
| News | - 1 |
| Point & Figure | - 1 |
| Cyclicals | - 1 |
| Seasonals | + 1 |
| Internal System 1 | - 1 |
| Internal System 2 | - 1 |
| Third System | + 1 |
| Historic Range | 0 |
| Commitment of Traders | - 1 |
| Range/Volatility | + 1 |
| Level Table | - 1 |
| Other Factors | - 1 |
| Total | - 7 |
Place 5 December Soybean Meal on a Sell Watch with stoploss @ +22.70 above the get-in point._____________________________________________________________________________________________________________________________W.G.
