Excess rain won’t change bearish bean fundamentals

August 4, 2015 10:17 AM
Could be “ideal” call sellers’ market

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Summer weather rallies in grains are often (but not always) great call selling opportunities for those that know true grain fundamentals.

Weather attracts news coverage which brings out the amateurs and fortune seekers. But weather rallies are often (but not always) overblown and thus markets can overprice what often turns out to be a somewhat benign event.

The current situation in soybeans may be such an event. In fact, soybeans could be setting up as an ideal situation for call sellers. It’s a wet weather rally (as opposed to dry or hot), it comes in the face of an otherwise bearish (if not very bearish) supply situation, and it arrives at a nearly perfect time of year.

While the weather bulls have driven soybeans to rally by $1.40 per bushel from mid-June to mid-July, the fundamentals don’t seem to support such a rally. If this is indeed baseless speculation, history suggests it won’t end well for the bulls.

While beans have since retraced some of their July gains, we feel the clock is running out for bean bulls and that further upside will be limited. This sets up a potential opportunity for call sellers as harvest approaches in September.

Below you’ll find a look at the real soybean fundamentals and suggests a course of action for astute traders.


Why the soybean weather rally?

Soybeans have been in a mild but consistent downtrend since last November as robust harvests in both the United States and Brazil bulked up global supply.

That trend was not helped by the ambitious U.S. planting agenda in 2015. U.S. soybean planted area for 2015 is estimated at a record high 85.1 million acres, up 2% from last year.

Prices continued to decline as a wet planting season finished up in June. But it kept raining. And raining, and raining.

The soaking weather pattern covered most of the key growing regions in the United States. Illinois, the country’s top producing soybean state, saw 11-14 inches of rain in key producing counties in June – a record for many.

This of course, brought out the weather bulls. “Too wet,” goes the argument, “roots will rot.”

I’ve been trading soybeans since 1984. I’ve seen my share of weather rallies. And one thing I can share is that dryness and/or heat are typically much bigger enemies to a soybean crop that rain. True, it is not unheard of for too much rain to hurt yields, either through root rot, fungus or outright flooding (see 2008). But a period of heavy rainfall, while concerning at the time, can often be recovered from prior to harvest.

“Rain makes grain” is an old farmer axiom for good reason.

Such could very well be the case now as the second half of July has been warmer and drier, allowing plants in Illinois, Iowa and Indiana to catch up on their sunshine while root moisture levels remain adequate. Indeed, soybean prices back tracking into August reflected improving weather conditions.

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About the Author

James Cordier is the founder of www.OptionsSellers.com, an investment firm specializing in writing commodities options for high net-worth investors. He is the author of The Complete Guide to Option Selling 3rd Edition (McGraw-Hill 2014).