By Todd Hultman
DTN Analyst
Here in April, as the Midwest is about to embark on another planting season, soybean prices find themselves in an unusual predicament. Fundamentally, all looks bearish as U.S. supplies are plentiful, a record harvest from Brazil is coming to market, and USDA is expecting 82.2 million acres to be planted in the U.S., the third largest on record.
Normally, we would see soybean futures sulking near their contract lows in a situation like this, but that is not the case this year as spot soybeans just posted their highest close in seven months on Monday. Either this is a good hedging opportunity for producers or something bullish is going on that we do not yet understand.
If we stick to the fundamental view, we have to say that this a good hedging opportunity. Much of the rally that has taken place since early March has been influenced by rising palm oil prices and a logic-defying buying spree in Brazil's real that has been feeding on the possibility that Brazil's President Rousseff will be removed from office. Rising pork prices within China offer some bullish hope that could trickle to soybean demand, but so far, the May/July soybean spread suggests an increasingly bearish commercial outlook.
However, it would be a mistake to limit ourselves to just the fundamental view. As I wrote about in the Jan. 4 article, "Lessons From Corn's Best Years," six of corn's seven biggest percentage gains over the past 56 years were the result of surprises.
When grains are in surplus, as they are now, and we pencil in new-crop estimates based on trend-line yields, the fundamental outlook has to be bearish, but that is not necessarily how things end up. The million-dollar question becomes: How do we know when a bullish surprise is a legitimate sign of higher prices ahead?
At times like this, a technical indicator based on what prices are actually doing can help. In this case, the indicator needs to be long-term enough to prove that a genuine bullish change is taking place, yet still be timely enough to benefit from recognizing the change. A little like protecting a town from floods, we don't want to be alerted every time the river rises, but we want to know when it reaches a certain dangerous level while there's still time to take action.
After examining spot soybean prices from 1980 to the present and looking at several possibilities, the best indicator of significant bullish change that I found was a weekly close above the high of the most recent 52 weeks. There have been 10 times since 1980 when this happened after prices were trading in the lower half of their five-year range. In eight of those times, prices finished the year an average of 23% higher.* The other two times ended lower by an average of 12%, giving the one-year breakout a positive overall expectation for higher prices by the end of the year.
Two of the benefits that I like most about using the one-year breakout are that it does not happen too often and, when it does, it has shown a high success rate of 80%.** By contrast, I also tested a six-month breakout over the same time period. It also showed a positive expectation for higher prices, but happened almost twice as often (19 times) with a success rate of only 53%. As an indicator, I have to conclude that a six-month breakout is technically neutral with far more false positives than a one-year breakout.
In the current situation, the one-year high in spot soybeans stands at $10.60 1/4, $1.32 above Monday's close and a price that many producers would be glad to get back to. The six-month high of $9.22 1/4 was exceeded on Monday and improved soybeans' technical outlook to neutral, but we cannot say yet that it is bullish.
Given the bearish fundamental outlook for soybeans, the unconvincing rally in Brazil's real, and the fact that spot soybeans' one-year high is still far away, it seems doubtful that the current rally in soybeans has much bullish potential. On the other hand, there is a whole new season in front of us, China needs more pork, and weather has yet to speak.
* Breakouts after Sept. 1 were considered too late in the year and were ignored. 2006 was the only such instance found and would have shown a positive gain, if included.
** While the past success rate of 80% is impressive and suggests that a one-year breakout is a significant bullish clue, it is not 100% and there is no guarantee that the high rate of success will continue.
Todd Hultman can be reached at todd.hultman@dtn.com
Follow him on Twitter @ToddHultman1
(CZ/AG)
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