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Soybean market 'fireworks' ahead?

The drought severity in the US continues to intensify, as Pro Ag yield models for corn and soybeans continue to decline in dramatic fashion. 

On Monday, the USDA  report showed once again that crops continue to whither during the summer of 2012.  While the weather forecast continues to call for improving rainfall, so far that additional rainfall has not occurred, and therefore prices rose into the beginning of this week.  

However, we quickly reversed fortunes earlier this week, indicating a potential market top was occurring in the markets.  Soybeans dropped nearly $1.50 from the Friday's highs to the Tuesday night lows, until recovering about 65c of those losses before seeing a selloff again.  Corn and wheat fared better, although a shot across the bow was received with the pressure in prices early this week.  Are we in the process of forming a top in grain prices?

While prices are high enough to be a top in corn and soybeans (we actually bested all-time highs last week), the crop condition continues to support higher prices for now.  In afternoon crop conditions reported Monday, July 23, the report verified that indeed last week we lost another 100 mb of soybean production potential, and about 400 mb of corn production as Pro Ag yield models for soybeans and corn were down 1.42bu/acre soybeans and 4.6 bu/acre corn.  

The soybean yield is now only 38.3 bu/acre, down 1.42 bu/acre from last week as conditions declined 3% to 31% G/E, while the poor/very poor category went up 5%.  Corn yields dropped to 133.5 bu/acre, down 4.6 bu/acre from last week as conditions declined another 5% to only 26% G/E.  

This is compared to 62% last year, and is a very poor rating for sure! 

Sorghum conditions also declined 4% to only 26% G/E, with HRS wheat down 5% to only 60% G/E, barley conditions down 3% to 57% G/E, and rice down 1% to 69% G/E.  Basically, all the other grains had a steady to declining week in condition rating as well, indicating all crops in the US (except oats, cotton, and peanuts) declined last week as well.  That is not a bearish weekly crop condition report!  

Pro Ag is not yet convinced that the market has made its top yet, as the condition ratings have not shown any improvement (and in fact have shown instead significant declines again this week) and so far the rain has not fallen in the Corn Belt.  So, a forecast can be changed 2x/day in the coming days.  Instead, perhaps for soybeans this is simply a retracement back to the breakout point on charts from the old 2008 highs?  We note that nearby August soybeans retraced overnight back to the breakout level of $16.50 (just slightly below it), but recovered somewhat after that price pressure.  Pro Ag recommended to buy soybean calls on the severe break into Wednesday morning to cover sales, especially once we broke above the old highs.   

Pro Ag moved to 75% priced 2012 crop corn and soybeans right at the 2008 highs; Pro Ag will now use a trailing stop now behind corn and soybeans to sell the last 25% of 2012 crop corn/soybeans, and also to hedge additional crops in the 2013, 2014, and 2015 crop years (unless you bought calls to replace sales, at which time instead we'd just simply liquidate the calls and take profits).  Start that trailing stop below 

the July report day lows (which are considerably below the current market), and plan to raise it as/if the grain market continues to rally from here.  We will try to make sales after the market tops in the majority of our sales this summer; letting the market run for now and capturing that value on the downside of the market.  Set targets of $24 soybeans to make sales regardless of the price direction or momentum ,as that would be an astronomical price (but one that HRS wheat reached in 2008, so that is the next technical grain target).  

As we stated prophetically last week, keep an eye on the soybean market; it could be full of fireworks yet if this drought continues! 

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The information contained, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe be reliable. The opinions and recommendations contained are based on our judgment and do not guarantee that profits will be achieved or that losses will not be incurred. Recommendations should not be construed as an offer to buy or sell commodities. 

There is substantial risk of loss in trading futures and options on futures.

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