Recently, markets are everything but not boring. There are many interesting situations and opportunities I can write about therefore the latest Spread report was also very extensive. Today I decided to analyze the soybean market for you. I consider it currently one of the best long-term opportunities not only within the grains but in general.
In the case of price development, there is not much to be dealt with. At first sight it is clear that the market has undergone a sharp sell-off within a short time. In such an environment, it is very difficult to estimate when the drop will stop. The fact is, however, that the price has approached the support at 850 cents.
Dramatic market change can be also seen on the term structure curve. Just a few weeks ago, the price was curvy, and we could identify different harvests. After the sharp sell-off, the steep contango literally stretched the entire curve downward and caused its smoothing. You can see this change in motion by using the slider under the term structure chart in the SpreadCharts app.
Strong sell-off accompanied by a significant change in market structure, have been caused by the US-China trade war. The introduction of import duties on soybean from China has reduced demand for imports from the USA. And because China was one of the largest buyers for the US, lower demand is not negligible. This fact, together with good stocks and expectations of good harvest in the US, caused a sharp fall in prices and a strong contango.
Term structure shows us the current state of the market. With SpreadCharts, we can eventually track the state of the market in the past. It’s definitely a great thing that cannot be missing in my analysis. For the better estimate of the development of the market structure over time, it is also advisable to use the contango development chart, both continuous and/or for individual spreads. The spread movement often signifies subtle changes in the market that might have an impact on future price developments.
Soybean spreads are a great example now. Bull Spreads refuse to decline together with the price even though the market is in such a strong contango. The market is likely to turn to an upward trend or at least into a growth correction.
The position of biggest players on the market also indicate the upcoming change in the market. The mood of the big speculators apparently worsened. There has been a sharp reduction in their speculative long positions and the COT index has almost get to the minimum over the past 17 years, to the -0.4 range. Such behavior in the past suggested a heavily oversold market and, therefore, change to a growing trend.
The hedgers are not yet indicating extremely stretched market rates. They have however significantly reduced their hedging activity. Producers do not consider the current prices to be attractive, on the contrary, the manufacturers are now having ideal time. It is possible that after the publication of fresh data, the COT indicator of this group will be close or even directly in the net long area.
All analyzes so far indicate that the market will go through at least a growth correction. We have strong support here, oversold market from the structure of the market and sentiment point of view. Bull spreads indicate the market’s drive for growth. But when exactly It will happen, nobody knows, of course. It may be tomorrow, but also in a few weeks.
But as I wrote at the beginning, I consider soybean to be a great long-term opportunity. To catch a falling knife is of course very difficult and especially dangerous. That’s why I took the situation in a more conservative way – through interdelivery spreads. Specifically, I opened the more distant bull spread ZSN19-ZSQ19. This will be described in the next article, because there are several advantages and disadvantages