With all the economic jitters today, investors and traders alike have been taking the cautious approach. As a result, because greed of previous years has turned into fear, to raise cash the good has been sold off along with the bad. Recently there have been some signs of stabilization in the outside markets (stocks and bonds) that should open the way for the good to shine through.

I see soybeans as one of those good markets, a market with decent fundamentals that's currently undervalued as a result of the margin call-selling that's taken place this year across the board.

Consider the following facts:

  • Tight supplies: The US Dept of Agriculture (USDA), in its most recent supply/demand report, once again lowered its ending stocks estimate for soybeans to an historically tight 185 million bushels. Additionally, South American supplies are projected to decrease. Argentina's equivalent to the USDA, the Argentine Association of Regional Consortiums for Agricultural Experimentation, or CREA, estimates the Argentine crop will be smaller this year by at least 9 percent, perhaps as much as 12 percent.
  • Robust demand: Last week exports were a huge 30 million bushels, again led by Chinese demand. The US has already shipped over 80 percent of the USDA's projected exports for this current crop year, with more than five months remaining in the crop year. China has been importing soybeans from us at a record pace.

How would I play these facts?

First, let's separate what's termed the old crop from the new crop. The new crop is the 2009 crop that will be planted in the coming weeks and harvested in the fall. It begins with the November contract. Private estimates point to higher new crop planted acreage. I'm not recommending buying November or later-dated soybean contracts.

The 185 million-bushel carryover estimate by the USDA refers to the old crop, the existing carryover supply from last year's harvest. This is represented by the May and July contracts; these are the contracts I suggest we focus on.

If current demand trends continue, the US could theoretically run out of old crop soybeans before the new crop becomes available. In reality, supplies never actually run out. What occurs is shrinking supplies effectively lead to higher prices, and higher prices eventually ration demand. We're looking to play for those higher prices.

The chart below depicts the May 2009 soybean contract.

May 2009 Soybeans


Source: Commodity.com

Looking at the chart, you could conclude the major trend has been lower since last summer. The contract low price was registered last December, with a first rally into January and a break into early March, a classic test of the lows. Recently, from approximately mid-February into mid-March, the market has been moving essentially sideways.

On the next chart I've drawn a rectangle around this sideways price action, and have added the 50-day moving average for the price, represented by the green line.

May 2009 Soybeans: 50-Day Moving Average


Source: Commodity.com

Let's magnify the right-hand section, the rectangle area on the above chart:

May 2009 Soybeans: Year-to-Date


Source: Commodity.com

You could make a case based on this chart that neither the bull nor the bear has been the clear winner over the past four weeks. The market has essentially traded sideways.

The bull would win a major battle should the market now be able to trade and close above the roof of the rectangle, a move above 895. Should this occur essentially every buyer over the past four weeks would be showing a profit in his or her account, and every bear would be on the losing end. The momentum definitely would have shifted to the bull camp, and this would be my first point to be a buyer. A suggested risk point would be to about 860.

After the first move above 896, we'd look for short-covering and new buying--the second confirmation of the bull move would be a rally and close above the 50-day moving average (currently 919 for the May contract). This would be an area to pyramid your position and simultaneously raise your stop to the 880 to 890 area. The projected upside target is the length of the rectangle above the roof; in this case a move equal to somewhere above $10 a bushel. This would be a decent return of more than $5,000 a contract while risking approximately $1,500 per contract.

The exchange currently requires a minimum margin (this amount per contract needs to be maintained in the account) of $4,725 per contract traded. If I'm right about this coming move, the market should confirm it with this one-two punch.

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Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the Holy Grail. Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

Hypothetical Performance
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.