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$11 summer soybeans?
Soybeans suffered a weekly downside reversal a week ago, with follow-through weakness last week. This is suggesting the completion of a head- and- shoulders top on weekly charts. That suggests a significant downside weakness could open up in soybeans.
We had two stages to the soybean rally from the fall of 2011: 1) the rally from fall 2011 from about $11 to $15 on the South American drought last year, and 2) the summer rally from $13 to $18 due to the 2012 US summer drought.
The two part rally has already seen a retracement from the US summer drought back to the $14-$15 consolidation area. And now that we have failed to rally above that consolidation area on the last rally, if we break below $14 it opens up the retracement of the whole SAM drought rally as well - right down to the $11 support area.
Weather in SAM has improved immensely in the past few weeks, with wet and cooler than average weather now locked in for the southern SAM production area that was previously dry - southern Brazil and Argentina. The new wet/cool forecast is just in time to salvage soybeans in these countries from what was originally feared to be devastating losses again. Instead, we might see these areas recover to near normal crops - a tremendous turnaround at a dramatic time in the marketplace - when soybean pods are filling! In the US, after seeing the corn crop drop to near 24% below 'trend' yields due to the July drought, August rains arrived to rescue the US soybean crop to only suffer 10% below 'trend' yield losses. So we know it can happen!
Pro Ag projects that southern Brazil might actually produce an average crop as the rains arrived earlier there than in Argentina. But Argentina might also see just small losses from 'normal' yields, due to the recent turnaround in weather. This is big news, as if SAM production comes through with flying colors in 2013 - that takes a tremendous load off the marketplace to do further price rationing.
Would it be enough to push prices back to the $11 area in soybeans by spring planting in the US? The soybean weekly chart suggests that it's possible, and perhaps even better than a 50% chance that it could happen! So that is concerning for producers who still own cash commodities of soybeans, and to a lesser extent, corn as well.
There are producers that are hanging on to commodities expecting a big return (like in 1995/96 for corn). It could happen, of course. But what also could happen is that producers get a great basis - perhaps even a positive 50c basis - by the time they sell the 2012 corn crop this summer. But the problem might be a basis compared to what? Futures prices could see significant price deterioration, if May soybeans drop to $11 by spring planting - due to adequate to above average South American crops. That would likely lead to deterioration in corn prices as well (although perhaps not as dramatic a decline as soybeans).
So, there is downside price risk opening up for grain commodities in the near term. The downtrend could be led by soybeans, which may need to retrace its rally from last year's SAM drought - especially if SAM produces a bumper crop in 2013. And that is increasingly looking more likely as weather continues to improve at a critical time.
So, this might be a time to lock up price protection on grains for the next few months. Using soybean puts to protect from price declines in corn and soybeans (and maybe even wheat) might be prudent for the near term - especially if South American weather continues to cooperate into harvest. If so, look out below - $11 soybeans may soon become reality!
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