By Gavin Maguire
The author is a Reuters market analyst. The opinions expressed are his own.
CHICAGO Feb 26 – May 2014 soybean futures have rallied more than $1.00 a bushel since the start of February on the back of brisk demand, tight domestic stocks and concerns about the scale and timeliness of South American export shipments.
Yet even as May prices edged to within 10 cents of their contract high, soy traders actively snapped up protection against a pullback in the form of put option contracts. Since the start of the month, more than 5,400 puts have been bought at the $13.00 strike price alone, suggesting that a heavy contingent of traders expect the recent march towards the $14 level to undergo a sharp direction change within the coming weeks.
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U.S. soybean futures fell to a 1-1/2 week low on Tuesday as China continued to shun purchases from the United States and as forecasts for improved rains in the coming days reinforced expectations for a sizeable Midwest harvest.
WHAT GOES UP
The purchase of put options as protection against a price reversal is common practice among many traders, especially in markets that undergo steep price rallies to levels not seen for several months and are deemed unsustainable in the long run.
In the case of May soybean futures, the recent stretch from around $12.70 at the start of the month to more than $13.50 and 17-month highs recently is a good example of such an event, and sparked a wave of put buying at an array of strike prices from $12.80 a bushel onwards.
Indeed, more than 10,000 puts have been bought since the start of February at just 4 strike prices – $12.80, $13.00, $13.20 and $13.40 – which collectively amount to the equivalent of 50 million bushels of potential selling interest.
At the psychologically significant $13 level put open interest in May options increased by 5,400 contracts since the beginning of May. Open positions at the $13.40 strike jumped from 126 lots on February 11 to more than 1,720.
A steep decline in options prices fostered some of the buying interest seen; $13.00 puts dropped from around 50 cents to 9 cents so far in February, while the $13.40’s dropped from 75 cents to less than 20 cents.
A bigger driver, however, appears to have been the frothy tone of May futures prices themselves, especially after they rallied more than 8 percent in under a month to stretch most widely-tracked momentum indicators into overbought territory on the charts for the first time since last summer.
US PRICES HELPED BY THE SLOW GOING IN BRAZIL
Even as expectations rise that U.S. soy prices are due for a pullback, a number of important factors have surfaced lately to justify the upbeat tone.
Locally, robust demand continues to underpin soybean and soymeal basis values at key locations in the interior as well as at export hubs. Continued strength in the U.S. export program lately has also reinforced positive price sentiment, and fostered a near total focus on diminishing U.S. crop supplies among many analysts and traders.
Further afield, the recent spell of soggy weather across parts of Brazil has threatened to snarl the transit of recently harvested soybeans and add to already lengthy wait times at that country’s ports. Recent reports from Brazilian agronomists that heat-damaged soy crops have been found across much of the second largest growing state of Parana have also underpinned market outlook.
With the South American crop already estimated to be by far the largest ever, it is unlikely that updated estimates of a slightly smaller record crop will be able to fuel a continuing rally in U.S. prices. That is especially the case given supplies continue to get loaded on a daily basis, even with the muddy roads slowing transport across the middle of Brazil.
And a shipment or two from Brazil to the United States cannot be ruled out, especially as American importers bought close to a million metric tons of Brazilian and other origin soybeans in each of the past two years to supplement domestic supplies late in the season.
Such imports are not gaining traction just yet in the market narrative, as it is widely understood that China has first dibs on the majority of the Brazilian outbound deliveries for the near term at least.
Still, the fact that the U.S. has imported soybeans from Brazil before means there is a precedent for that happening again, which will be in the back of traders’ minds if prices continue to rally going forward.
On its own, that threat of potential imports may not be enough to limit this market’s progress over the near term. But in conjunction with the amassing put interest just below current May futures values and the sell signals being emitted by this market’s technical charts, a momentum change could be looming that finally delivers the first meaningful setback in soy values in close to a month.
