Soybeans - Comfort Zone
Written for Sevita by Bailey Elchinger, Risk Management Consultant and Regional Director, FCM Division of StoneX Financial Inc.
The Comfort
Ending the month of October the bean market seemed to be comfortable with the projected carryout and perceived size of the U.S. bean crop. The SF25 contract dropped to near contract lows to wrap up the month of October. As November began, repeated export sale ‘flash’ announcements helped build optimism about bean demand and the market became less ‘comfortable’. After reaching above the 50-day and stopping out at the 100-day moving average, the SF25 contract retreated lower. Export optimism was one of the key reasons for strength in early November. Following the U.S. Presidential election many in the bean market became unsure about the future of U.S. commodity exports. This uneasiness led to a sell-off back to near contract lows. In addition to export fears, concerns surrounding U.S. biofuel policy began to surface as well. President-Elect Trump quickly began naming his cabinet picks and other leaders for his administration. Some of these leaders have historically not supported various biofuel initiatives. This uncertainty contributed to the sell-off in the bean market. Once the market found its old lows it bounced once again. The continuous up-and-down movement tells me that the market seems to have found its comfort zone for trading.
The Zone
As the holiday season approaches it is very common that trading becomes very light and volatility eases. This time of year, traditional fundamental news is hard to find. We typically are watching South American weather closely as this is a key time in their growing season. The weather this growing season in South America has been adequate. There was dryness early, but rains have eased those fears. With a void of fresh fundamental news, it is common for the markets to become range bound as they await the mid-January USDA stocks and production report. To break out of that comfort zone we will need a new story.
New Story?
What could the story be that moves us out of this range? Without fundamental news the bean market will, unfortunately, be subject to geopolitical and policy headlines. The U.S. and China relationship tends to be a hot-button issue for the bean market, but the conflict receiving most of the headlines currently is the Russia/Ukraine conflict. U.S President Biden recently approved Ukraine to use U.S. supplied long-range missiles to strike Russia. Russian President Putin quickly stated, “Aggression against the Russian Federation and its allies by a non-nuclear country with the support of a nuclear state will be considered a joint attack.” That statement heightened concerns considerably that this would lead to the next escalation in the conflict. Despite these fears the wheat market’s reaction was very muted (compared to expectations). The escalation also didn’t seem to impact the bean market directly either. With Russia/Ukraine getting the media attention and fears surround China and Taiwan have also gone by the wayside. So, what story moves us out of range? Sadly, a government policy decision is likely the deadline that moves the bean market in the term – which is incredibly difficult to predict!
Don't let yourself get into too much a comfort zone when it comes to marketing your old crop bushels. It is easy to be ‘lulled’ to sleep in a quiet market. Now is the time to make, and stick to, a plan for liquidating those bushels. Have targets in mind and stick to them. If, and when, the market trades out of its comfort zone you have to be ready to react.
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