News of larger-than-anticipated old crop inventories alongside record-large new crop plantings slammed the US soyabean market this week, pushing both old and new crop prices to their lowest levels in more than three months. Still more long liquidation and short selling pressure should emerge over the near to medium term, given the friendly weather outlook for the emerging new crop even as large speculators continue to sit on more than 100,000 contracts (500 million bushels) of long futures and options positions.
Some dip buying should emerge once selling pressure eases. But until a material change emerges in the outlook for new crop supplies, the path of least resistance for prices may be lower. If savvy end users slow their buying as large speculators bail out, November prices could gather enough downside momentum to slip under their 2014 lows in the $10.88 a bushel region.
At 84.8 million acres, this year's US soybean crop has the largest area footprint ever, and thanks to broadly friendly weather conditions crops ratings so far this season have come in at their best levels in years. This combination is setting expectations for a record-large harvest in the fall.
But if growing conditions stay benign through early August, when the soy crop undergoes its most critical developmental process, crop estimates should inflate further into uncharted territory. This should discourage aggressive end-user buying, and could weigh heavily on prices as long as weather conditions remain largely non-threatening to a majority of the crop.
The combination of a record-large South American soybean harvest and projections for a rise in US plantings has fuelled a soybean market positional swing by the large speculative trading community from net long to the tune of nearly 180,000 contracts in early March to net short roughly 600 contracts lately. However, this shift in non-commercial positioning has largely been fuelled by a steep rise in short selling activity rather than long liquidation.
Indeed, the latest assessment by the Commodity Futures Trading Commission (CFTC) of large speculator long positions in soybean futures and options is more than 140,000 contracts, which represents a substantial amount of potential selling volume should those traders opt to cut their losses ahead of any further potential price breaks. Such selling pressure, if it coincides with continued strong crop ratings from across the Midwest, could trigger a fresh downward leg to new crop prices, potentially to below the $10.00 level.
Options market traders seem to be bracing for such a development, with put open interest at the $10 November strike up more than 10,000 contracts or 44 percent since just before the USDA crop and acreage release. The price of those options has roughly trebled since pre-report levels, and appears to be well supported above the 9 cents a bushels level after having traded for most of June below the 6 cents mark. Additional purchasing of such bearishly positioned options would likely indicate that traders see substantial downside risk for November futures, even after a slump of more than $1 per bushel seen already since the USDA release.
