By Gavin Maguire
CHICAGO Dec 17 – U.S. soybean export sales are running at their fastest pace in years, and have already surpassed 90 percent of the projected total for 2013/14 with more than eight months of the marketing year still to go.
But more than 60 percent of those sales have been contracted to China, which has in prior years has torn up sales agreements once global prices slumped below the purchase price for any as-yet-undelivered sales. The recent surge in bearish put option purchases tied to soybean futures slated for delivery in early 2014 suggests traders are bracing for a fresh wave of such cancellations in the New Year, especially if projections hold up for a record South American crop in 2014.
Read Also
Feed Grains Weekly: Price likely to keep stepping back
As the harvest in southern Alberta presses on, a broker said that is one of the factors pulling feed prices lower in the region. Darcy Haley, vice-president of Ag Value Brokers in Lethbridge, added that lower cattle numbers in feedlots, plentiful amounts of grass for cattle to graze and a lacklustre export market also weighed on feed prices.
LEADING THE CHARGE
Strong soybean prices have been the bright spot of the U.S. agriculture sector for the past several months, a strong contrast to the steady slump in grains, especially corn.
And one of the main drivers of the soy market strength has been the brisk pace of U.S. export sales, running at a record for this juncture in the marketing year with close to 39 million metric tons already papered in agreements since Sept. 1.
Supply pipeline replenishment has been a major driver of general soy market demand growth in recent months. Global consumers have been tapping into U.S. supplies during the recent harvest to restock bare inventories and fill consumption needs.
The same holds true for crop importers, who have been buying lately to replenish reserves as well as meet ongoing demand requirements.
Even so, the breathless pace of U.S. sales to date has left some traders nervous that importers may have overbought during their recent spree, especially if the favorable growing conditions seen to date in South America foster a record crop from the region over the remainder of the growing season.
GROWING RISK
Traders are especially concerned about China’s heavy load of U.S. soybean purchases, also at a record for this point in the year.
The world’s top soybean buyer and consumer has shown a penchant for canceling U.S. sales orders early in the New Year once its buyers get a better handle on the likely extent of Brazilian soy supplies.
This tendency to cancel U.S. sales orders is viewed as likely to be repeated in 2014 should South American crop projections remain high, as Chinese buyers took steps over the past 10 years or so to diversify soybean purchases away from the United States, and recently have begun to source a majority of their soybean supplies from South American growers.
So far, China’s purchases of close to 40 million tons of U.S. soybeans would represent around 57 percent of its full-year soybean import projections. This would mark a significant deviation from the recent trend of securing around 45 percent from the United States and the remainder from South America.
In light of this apparent overreach for U.S. supplies on the part of Chinese importers, U.S soybean traders are bracing for a string of potential U.S export sales cancellations from China over the first quarter of 2014.
The chief method that traders are employing to protect themselves from such an event is the purchase of soybean put options, which allow the holder to lock in a certain sale price of soybean futures even if market values descend below that level.
The $12 strike price in March soybean futures has been a particularly popular put option to hold since November, with open interest at that strike topping 19,000 contracts currently, or roughly 95 million bushels.
But of late, traders have also been snapping up $13 puts, with open interest at that strike growing by more than 140 percent since the start of December to the equivalent of more than 55 million bushels.
Put option buying has also been seen in the January time slot. But because those options expire before the end of the year, a majority of option market put buying has now migrated to the March time slot, which should capture the lion’s share of the remainder of the South American growing season which is when Chinese purchasers are deemed most likely to renege on any U.S. deals and instead look to lock in more affordable purchases from South American sellers.
Should that happen, U.S. prices could slide, presenting traders holding put options with a chance to sell soybeans at prices substantially above prevailing market values.
