Thursday, May 21, 2009

The Debts of the Spenders: Soybeans Bullish for Summer 2009

While soybeans stocks remain fungible, the supply story is not looking good and is thus driving up prices.

*Oh yea, the weaker dollar has something to do w/it.*

Tight Old-Crop Soy Stocks To Keep Bullish Trend Flowing

Soybean futures prices are likely to remain on a bullish trend this summer because of market ideas that old-crop inventories will tighten below current government estimates.

Bullish sentiment is the driving force behind Chicago Board of Trade soybeans’ two-month rally, and with strong underlying demand, fears are mounting that oldcrop supplies could run short by the end of the 2008-09 marketing year.

Private analysts are lowering their forecasts for old-crop ending stocks, with some calling for ending stocks below 100 million bushels. U.S. Department of Agriculture estimated 2008-09 U.S. soybean inventories at 130 million bushels May 12.

“One hundred million bushels is only a matter of 10 days of usage, and that places increased pressure on end users to secure supplies with only a small cushion of inventories available,” said Gavin Maguire, research director at e-Hedger in Chicago.

Prices have rallied in an attempt to ration demand, as strong export interest from China continues to dwindle down old crop inventories. Shrinking production prospects for Argentina has shifted demand to U.S. shores as well.

Meanwhile, stronger soymeal export demand has spawned another bullish argument for the soybean market as the boost in crushing activity puts an additional strain on tight old-crop soybean inventories.

The bullish theme is expected to carry into the fall harvest, with traders and end users concerned about soy product availability, said Dan Basse, president of AgResource Company in Chicago.

Bull spreads have served as bullish signals for the market place, illustrating the concern participants are placing on tight old-crop stocks. The July/November CBOT soybean spread since April 28 has rallied from 83 cents to $1.50.

The July-November spread is a bull spread, and refers to being long a nearby contract and short a deferred contract. It is called a bull spread because these spreads most often perform best in bullish, demand driven markets. When a commodity is in short supply, nearby contracts can go to significant premiums over the deferred and outer contracts may lag as they expect deliveries
from future production. The spread has peaked at $1.66, but gave ground on profit-taking Wednesday, raising concerns that upward movement was exhausting, with the trade figuring the
market’s bullish attributes were already factored in.

AgResource Company in a market note Thursday said they doubt that the bullish run is over, but amid a lack of fresh demand news, some consolidation of gains is anticipated. New investment funds are expected to push into the grains and all commodities on any modest correction, AgResource added in the market note.

Not-so-firm cash basis at the gulf, rumors of China canceling prior purchases and end users having second thoughts about buying beans at $11.50 a bushel are factors, however, that could limit nearterm gains, Maguire said.

Nevertheless, inventories are tight enough to warrant the current run up in prices. But pushing prices above $12.00 a bushel is questionable unless China’s appetite for U.S. soybeans remains stout and domestic crusher continue to bid up prices in an effort to secure supplies late in
the marketing year, Maguire said.

Planting delays for U.S. soybeans is another factor that will keep risk premium in the market. The potential for the late arrival of new crop soybeans from the southern Midwest and Delta raises additional concerns for end users looking for supplies in the fall.

“Normally early harvested soybeans from the Delta in late August and early September can take away some of the strains on tight old crop inventories,” said Maguire. “But given the planting delays this year, they might not arrive in time if demand keeps up,” Maguire added.

The market is poised to continue on a volatile, bullish course, with downside potential limited as buyers swoop in to buy profit taking price breaks. Despite the strong upward push in prices,
export demand has not wavered. The USDA announced Thursday sales of U.S. soybeans
for export in the 2008-09 marketing year during May 7-May 14 totaled 700,600 metric tons, 74% above the previous week. With 15 weeks remaining in the 2008-09 marketing year export commitments of 1.233 billion bushels are 99% of the USDA’s export projection for the year.

Source: CME News for Tomorrow
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