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Rich Nelson: Soybean market bends but doesn't break

It was a surprise to see soybeans stand aside and watch the corn in a freefall Friday.

July soybeans just hit new highs yesterday. This is not a bear market yet. We do expect the end of the month acreage report to be a show stopper for soybean bulls. Additionally, we have pointed out in the coming months we will also see USDA revise down their very aggressive new crop export expectations. As Bill noted last night, soybean ending stocks will change dramatically from the May and July numbers to the final report.

Direction: The sharp drop in Argentine soybean production and subsequent increase in US export sales has dramatically tightened this old crop market. Back in January, USDA indicated ending stocks were 225 million bushels. This week they used a 110 million bushel estimate. Currently, soybeans prices are trading mostly on old crop fundamentals. However, around July the market starts looking at new crop numbers as the main driver of price. Next week we will finish our price outlooks based on the current situation. Until then, we will stay with our trading plan of selling on a breakout from this uptrend. So far that has not happened. For hedging we have been pleased with the option position in hand. Joe did a good job in using the 1100 call as the one to sell against. This market has not rallied past that point. If it would, the losses on the short 1100 call would offset exactly the gains in the cash soybeans and the net farm position goes neutral. For producer hedging plans there is little doubt that when this market transitions to taking direction from new crop numbers, that down will be the only way here. Next week we will evaluate our limited hedge position after finishing the price outlooks.

Trade Idea(s):
(06/10) Sell Nov 1039 stop close only, risk 25 from entry, objective 970.

Option Strategy(s):
(05/14) Sold Jul 1040 put 16 3/4, risk at 16, objective 0. Closed 3/8.
(06/09) Sold Nov 1240 call/sold Nov 800 put 62 1/4, risk to 90, objective 20. Closed 63 7/8.

Soybean Technical Commentary: Beans also saw a sizeable pullback today, but the short-term uptrend remains intact, as does the 10 day MA. Further weakness next week might break this trendline, but it still could be part of a larger correction.

Vital Technical Indicator: the next projected major turn day for soybeans is June 16, soybean meal is Monday, and soybean oil is June 18.

Hogs: This week was a rough one for the pork industry. We learned pork exports in April were worse than expected and saw H1N1 get back in the headlines with a WHO upgrade. We can also note this week’s kill was up 1.3% from last year in the same week. If we had a normal hog flow we should be transitioning from a 3% lower slaughter for early summer to a 1% lower slaughter for summer. Instead we have some numbers backed up that are also at heavier weights. This week’s pork production (slaughter x carcass weight) is up 3.6% from last year in the same week. We hate to say it but so far, there is nothing out there suggesting this market will be able to get much above $60 this summer. If pork exports remain weak past this summer then December hogs are on the road to $50. As noted in commentaries before this, current breakevens are around $72. The question is not whether liquidation will happen but when. For trading we had to right idea with the July/December spread but not the right entry price.

Trade Idea(s):
(06/12) Buy Jul/Sell Dec -.75 or better, risk to -2.10, objective +3.00.

Option Strategy(s):
(06/01) Sold Jul 69 call 1.07, risk at 1.10, objective 0. Closed .47.

Lean Hog Technical Commentary: Hogs were unable to follow through on yesterday's strength today. The market posted a small inside bar on the chart, however, the stochastics are pointing upward so we'll leave our buy stop in place at 61.65.

Vital Technical Indicator: Next projected major turn day for lean hogs is June 17.

It was a surprise to see soybeans stand aside and watch the corn in a freefall Friday.

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