From the November 01, 2010 issue of Futures Magazine • Subscribe!

Grains: Drought and demand

Soybeans along for the ride

Shortly after wheat and corn began their rallies, soybeans followed starting at $9.30 per bushel on July 1 and rising to $11.33 on Sept. 27. The reasons for the rally, though, have not been as clear as they were for wheat or corn. "For soybeans, there are no problems at all in either supplies or production, they are simply being dragged up right now by wheat and corn," Nelson says.

Unlike either wheat or corn, neither supply nor production are behind the rally in soybeans. "Shocking soybeans" (below) shows that far from a shortage of soybeans, we are actually looking at a record breaking yield year.

chart

Instead of a supply issue, it seems soybeans have just been pulled in the same direction as the rest of the grains complex. "This is not a bull market being made on supplies. First, this is all based on the idea of fund money rallying into commodities in general, which carries over into beans. Second, it is an acreage argument we are working out," Nelson says.

Those two factors are not unique to soybeans, but they seem to be having the greatest effect in this segment of the market. What is unique, though, is the continued interest China has shown in soybeans. Because of unfavorable weather conditions in China, they have been working to build their reserves to prevent any sort of serious food shortage or crisis from developing, according to Streible. "[Soybeans are] all about China. Soybeans have bounced off the $10 price quite aggressively and that has been very strong support. Chinese buying has really put a floor on this market above all else," Chesler says.

With corn and wheat prices reaching two-year highs, an acreage battle is ready to breakout as farmers begin making decisions about next year’s crop. "There is speculation there is going to be a potential acreage battle between soybeans and corn next year. Initially, when we saw the shortage and rally in wheat, a lot of farmers were indicating they were going to plant wheat this year," Streible says. "[An acreage battle] can drastically swing prices, especially if you are getting an additional million acres getting allocated to certain crops."

Looking to November, Chesler says $10 has proven to be a very strong support level. He expects $11 beans on the expectation that China will stay in the market. Streible is even more bullish with $10.50 support and anticipating $11.25 beans.

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