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New dynamics in the soybean market

Soybean traders are talking about the possibility of a blow-off top in the front end of the soybean market. I'm not so sure about that. As I've been saying for weeks, the funds don't want to give up their front-end positioning as a large amount of the length is tied to various "cross-hedging" strategies trying to protect larger macro uncertainty and billions of dollars at risk in South America.

You can dream up or listen to all the fundamental and technical talk you like, but the money flow is coming from a much larger and different crowd than normal. They don't care about the historical highs in the old-crop vs. new-crop spreads. They don't don't care about the cash deliveries, etc.

What they do care about are headline risks associated with their bullish bets, i.e., headlines as the impeachment trial in Brazil begins, "Brazils Rousseff Vows To Fight To The End As Impeachment Trial Begins" or how about Forbes' "Global Investors Put Brazil's Interim President Michel Temer On Notice." The article begins..."Brazil’s new interim government leader Michel Temer has global investors rooting for him, but no one with millions of client money on the line can ignore the fact that this country is very much on fire. Temer’s job is to get everyone out of the building in an orderly fashion. Doing so without injury is next to impossible. Meanwhile, the labor market continues to deteriorate and banks aren’t lending because businesses are not taking on debt." 

How about the recent, "Out with Temer!' Brazilian police fire tear gas, rubber bullets at pro-Rousseff protesters". It begins... "Clashes have erupted in Brazil with police deploying tear gas and rubber bullets on protesters voicing their opposition to the country's new interim government. It follows the suspension of President Dilma Rousseff in a move that many are calling a coup. Demonstrators hit the streets of Brazil's largest city, Sao Paolo, for a rally calling for the removal of acting president Michel Temer." 

Lets move over and look at Argentina. How about the recent headline from Fortune, "Argentina's New Reform-Minded President Is Facing His First Big Test." It begins..."When Argentine President Mauricio Macri took office in December, he knew it might not be long before he’d face pushback against his market-oriented economic reforms. Less than six months into his presidency, that time has already arrived. Macri has been cutting spending, but such reforms have been met by hosannas among foreign investors, as they are inflicting short-term pain at home: stoking poverty, anger, and political opportunism. The Central Bank has raised interest rates as high as 38% to increase peso savings and cut inflationary consumer spending. In another sign of frustration, influential labor union leaders are bristling at Macri’s economic policies and have started staging big anti-government rallies. But at a time when foreign leaders and financial markets still applaud him, the domestic situation is becoming more taut. His approval ratings dropped from 51% in March to 44% at the end of May. If his popularity drops too much, there is a danger Macri could cede to political pressure and ease off tackling the budget deficit (often called “slippage”). If he does this while continuing to tap global bond markets at high interest rates, Argentina could veer toward default."

Perhaps now the trade can understand why larger macro players are worried about their long exposure in both Argentina and Brazil. If the governments unwind and the banks stop taking on risk and government programs are halted, being long in the soybean market is at least some type of cross-hedge and small portion of a protective web the large investors are trying to weave in order to protect their billion dollar bets.

Four of Brazils top exports are soy, iron ore, sugar and crude oil. Look at price charts since late-February on all four of these commodities. I'm obviously not saying this is the sole exclusive reason for the rally, but I am saying it has added a new dynamic and a couple more cylinders of horsepower to the market.

Certainly there's a bullish fundamental story also brewing. Argentina struggles to get supplies form the crushers to the ports, and Brazil may run out of available bean exports much sooner than anticipated. We also have commercials "switching" back to U.S. suppliers and China in the market buying old-crop beans for July and August delivery.

I continue to believe the larger players in the market are going to be defending their bullish bets and buying the larger breaks. As a producer, I will be closely monitoring the market as I would like to make another new-crop cash sale north of $11.20 per bushel. I'm also keeping my eye on the NOV17 contract for a push north of $10.10.


TAGS: Soybeans
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