With equity prices collapsing and gold prices soaring, it might be comforting for investors to know that there are some investment classes out there that still respond to good old fashioned supply and demand fundamentals.
The soybean market serves as a perfect example this month.
While a July hot spell in the Midwest kept soybean traders on edge for a few weeks, August has brought a return to more moderate weather conditions. What August also brings, however, is the soybean "podding" season. Podding is when the soybean plant "sets pods" that eventually become beans. It is a critical period of development similar to the pollination period in corn. Once podding has successfully taken place, the crop is said to be "made." This typically results in soybean farmers breathing an annual sigh of relief. Prices can also react accordingly by beginning a decent that can last through harvest. Industry people often refer to such a decline as a "harvest low."
If a US recession theme continues to permeate financial markets, additional pressure on soybean prices could follow. While there is no guarantee that prices will react in this manner this year, the conditions seem right for a price break into autumn. While midsummer heat may have resulted in a some isolated areas of yield reduction, the 2011 US crop should emerge largely intact yielding about 3.056 billion bushels of soybeans. The US Soybean Harvest begins in September Based on this figure, US ending stocks for 2011/2012 are pegged at a somewhat tight 155 million bushels - a number many in the soybean trade consider a bullish force into 2012. However, the chart below indicates that Global supplies are adequate. This is largely the result of increased production out of Brazil. It is also the reason why soybean prices did not react more dramatically to the US heatwave in July. Soybean ending stocks appear quite adequate into next year Global soybean supplies are expected to be quite adequate heading into 2012. Conclusion and Strategy While there are bound to be some adjustments up or down to the 2011 US soybean yield, it is likely that the time for a major weather threat to the crop has passed. During "normal" crop years, which this appears to be, anxiety tends to fade from the soybean market in August. As harvest begins in September, prices will often begin to reflect the impact of fresh supplies on the market (adjusting lower.) US ending stocks are expected to be relatively tight in 2012. Yet, global stocks appear quite adequate, which should temper any "surprise" late season soybean rallies. If a US recession theme continues to permeate financial markets, additional pressure on soybean prices could follow. We like the approach of selling deep out of the money soybean calls this month in an effort to take advantage of any harvest related price pressure over the next 30-60 days. As you know, soybean prices do not necessarily need to fall for you to profit from this strategy. They only need to not have a fast and extreme rally. US harvest, healthy world stocks and a new shadow over US and global economies should make a runaway rally unlikely Unlike a bad earnings quarter or a merger gone south in stocks, global soybean supplies do not change overnight. That is your advantage in selling deep out of the money options based on long term fundamentals. As an individual investor, you can consider the March contract for the right balance of time decay and distance from the money. We are positioning managed accounts in soybeans this month.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
