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Commodity Trading Sample: Soybean Futures Market Overview

Overview

Soybeans are relatively new to the agricultural scene. The importance of Soybeans did not begin to show itself until after the Second World War. However, since then beans have become a major crop in the agricultural world. Soybeans are grown primarily for the beans, which are processed into oil and meal. Grown primarily in the Corn Belt states of Illinois, Iowa, Minnesota, Indiana and Ohio, Soybeans are a short bush-like plant.

Production Considerations

Soybeans show a very similar pattern of building and destroying of the crop’s “risk premium” as Corn. They also are grown in predominantly the same area of the country as Corn. At the onset of the calendar year, the Soybean crop, too, must deal with tax- related selling, as well as transportation problems. Soybean farmers have a vested interest in postponing their marketing into the New Year for tax purposes, but typically at the beginning of the year they must begin to transform their supply into cash to finance the impending planting effort. Couple this selling with the likelihood that interior waterways (the primary and cheapest way to transport grains) are frozen at this time of year. Grain elevators, the middlemen who buy grain from farmers and store it for later sale to consumers, tend to lower their bids for grain during the winter to protect their profit margins as the frozen waterways increase their transportation costs. These forces tend to reach a crescendo in early February, just before field preparation for planting and the rivers begin to thaw. Soybeans tend to bottom a little ahead of the other grains, as the South American Soybean crop is approaching pollination during January and February and, therefore, is very susceptible to damage.

World Production of Soybeans in 1998

	1,000 Metric Tones
Argentina	18,000
Bolivia	900
Brazil	30,900
Canada	2,737
China	13,908
India	5,700
Indonesia	1,306
Mexico	132
Paraguay	3,304
Thailand	376
States	73,900
USSR	350
World Total	155,988

Worries about the South American crop development, as well as potential planting delay fears, grip the Soybean market and cause prices to bottom in early February. The bulk of the Soybean planting in the United States is started by May 10^th with planting usually completed by June 23^rd. Ideally, planting should be done during mild temperatures with moderate precipitation, so the ground is soft and easily manipulated, but firm enough to support the heavy farming equipment. If the temperature is too hot/cold and too much/little precipitation is present, then Soybean planting can be delayed. Late planted crops or replanted crops tend to produce lower yields. Planting delays have been a frequent problem over the years and, therefore, the marketplace is usually justified in building a risk premium this time of year.

Usual Planting Dates for Soybeans
(Top 5 producing States)

State	Begin	Most Active	End
Illinois	May 6	May 15 - Jun 9	Jun 16
Iowa	May 4	May 14 - Jun 2	Jun 17
Minnesota	May 6	May 16 - Jun 3	Jun 23
Indiana	May 5	May 15 - Jun 5	Jun 20
Ohio	May 5	May 10 - Jun 7	Jun 23

Dates based on the December 1997 USDA Agricultural Statistics
Board Usual Planting and Harvesting Dates report

Several days after planting, the Soybean plant begins to emerge from the ground. Though the Soybean plant is considered one of the most drought and foul weather resistant of the crops grown, until its extensive root system develops, the Soybean plant is very vulnerable. The Soybean plant is periodic in nature, so maturity can be tracked on a calendar with accuracy of a few days for each stage of development. After several weeks, the Soybean plant begins to form buds, which will eventually bloom, setting the stage for pollination.

USDA/NASS Crop Progress Timetables

Soybeans are considered to have bloomed as soon as one bloom appears on the plant and will end up with several blooms. The blooming/pollination process is the most critical stage of development of the Soybean crop. Good pollination almost assures a strong plant and good yields. Soybeans usually pollinate in the second or third week of July. After pollination, the plant begins to form bean pods, which are roughly 1 to 2 inches long and contain 4 to 6 beans. Once the Soybean plant has pollinated, it has developed a vast root system and is almost impervious to most weather conditions (with the exception of a frost) and, therefore, the crop is “made”. The blooming phase of development typically lasts from the beginning to the end of August, with pollination occurring roughly a third of the way through the process.

The Soybean plant is considered to be setting pods when pods are developing on the lower nodes with some blooming still occurring on the upper nodes. Because Soybeans have such a vast root system, the Soybean plant is able to continue to grow in height, often reaching 72 inches before the pods are fully developed and the plant begins to deteriorate. Normally, during this stage of development, which lasts from late July through late September, prices drop precipitously, as risk of damage to the crop is minimal.

As the pods develop fully, the lower leaves begin to die as nutrients are used for pod development. Soybeans are considered to be dropping leaves when the leaves near the bottom are yellow and dropping. Leaves near the top may still be green, but 30% to 50% are yellow. Leaves typically drop from late August through early October. At the later stages of leaf dropping, the plant is susceptible to freezes, which can split the pods and damage the crop.

The Soybean harvest usually begins by September 21^st, with the most active period being October 1^st through October 25^th. The Soybean harvest is normally completed by November 10^th. Ideal climatic conditions for harvest of the Soybean crop are moderate to slightly above freezing temperatures with little precipitation. Warm and wet weather can make fieldwork messy, while early, heavy snowfall or severe rains can make harvest next to impossible.

Consumption Considerations

Most of the analysis presented for Soybean tends toward being based upon supply, as demand tends to be fairly evenly distributed throughout the year. However, in the latter part of the year, demand for Soybean Meal tends to support Soybean prices, as Soybean Meal is the preferred winter animal feed, due to its attractive protein and fat content mix.

Whole Soybeans have very limited uses, they can be held for seed for the coming crop, baked, puffed, steamed or roasted for animal feed. The greatest demand for Soybeans is its products, Soybean Oil and Soybean Meal.

Soybean Oil and Soybean Meal are extracted from Soybeans in a process known as “The Crush”. Originally oil and meal were extracted from Soybeans using large mechanical devices, which would crush the beans to extract the oil, and the leftover product is cleaned to make meal. Today, the common method of extraction is chemical, though the process is still referred to as "The Crush".

The major use of Soybean Oil is in the form of edible oil products such as margarine, salad and cooking oil, and shortening. Oil also has limited industrial uses in chemical production, paints, lubricants and varnishes. The major substitutes for Soybean Oil are rapeseed oil, cottonseed oil, sunflower seed oil and animal oils such as butter, lard and fish oil. Because of the highly competitive nature of the oil industry, and the high degree of substitution, Soybean Oil only accounts for about 20 percent of world oil consumption. Increases in the demand for edible oils, or restriction of supply of substitutes, will cause Soybean Oil to become more valuable and thus increasing the demand for Soybeans.

Almost 90 percent of the Soybean Meal produced is used as animal feed. Soybean Meal is an excellent source of protein and amino acids for livestock. Animal feeds are very substitutable, so corn, rapeseed, flaxseed and cottonseed meals are all used in lieu of Soymeal, if they are more favorably priced. The basic demand for Soymeal is tied to livestock prices. As livestock prices increase, so does the demand for feeds such as Soymeal. As the demand for Soybean Meal increases, so does the demand for soybeans.

Demand is a pivotal component of Soybean prices. Demand has been running at record levels for the last several years due to large feed usage and heavy use of Soybean Oil. Compensating for the high usage figures has been extraordinary production. However, with the large amount of usage, any shortcomings in production in the coming years could see prices explode.

Major Issues in 2001

To themes that grabbed headlines during 2000 may be important in 2001: “Mad Cow” and “Genetically Modified Crops.”

The discovery of “mad cow” in Europe and the resulting ban on bone meal based feeds may lead to increased consumption of grains in 2001. Bone Meal has been used quite heavily in Europe and parts of South America and Asia. With a possible link between this type of feed (rendered animal products) and “mad cow” disease, many of these regions may switch to traditional animal feeds, like Corn and Soybean Meal. With grain usage running at record levels in 2000, increased usage due to switching from bone meal based feeds to traditional feeds may result in more fear of tight supplies in the coming year.

Producers have switched to genetically modified seeds and crops in recent years because these hybrid plants require less water, pesticides, and maintenance. These new super plants may be part of the reason for the record yields and large supplies seen in recent years. However, problems with one variety of genetically modified Corn - Star Link – have brought the use of these hybrid crops into question. The European Union froze US imports of Corn briefly – before testing for Star Link – and public awareness of the practice may discourage producers from relying on these as much. With the market place putting a premium on natural - organic – grains, producers may switch. This means that crops are more vulnerable to weather, and may result in greater price swings due to weather concerns in 2001.

Historic Price Overview

Soybean prices - as measured by the nearest to expire futures contract – ranged from $4.33 ½ to $5.70 ½ per bushel in 2000. The low made in May of 2000 was higher than the low made in July of 1999 at $4.01 ½ per bushel.

Note: Chart compliments of www.geckosoftware.com Past performance is not necessarily indicative of future results.

On the long term monthly charts, Soybeans are forming a 1-2-3 Bottom, with the #1 point at $4.01 ½, #2 point at $5.70 ½ made in May ’00, and the #3 point at $4.33 ½ made in August ’00. Watch for a breakout above the 1999 highs as a sign of serious rally.

Shorter term, major resistance appears on the Soybean chart at $5.20 to $5.50 per bushel, while support is in the $4.30 to $4.50 range.

Seasonal Overview

Tax selling of last year’s crop has tended to weigh on prices at the beginning of the year, culminating in one of the best known seasonal tendencies in the grain markets, the "February Break". In recent years the February Break has tended to occur in late January and early February. During the production cycle of the Soybean crop, the predominant feature is fear that the crop will be damaged, thus reducing yields. An old grain traders saying is “ Grain Crops are killed 3 times a year”

1) Once during the spring when it is too hot/cold/wet/dry for planting or for
the crop to emerge.

2) Once during the summer on fear of too little rainfall for pollination.
(This is the potentially explosive rally in the summer. Though highly reliable, this phenomenon is not for the timid as drawdowns can be quite large and volatility is great.)

3) Once during the autumn on early frost or harvest delays.

After each of these potential crop-destroying events, prices tend to break as worries grow about the coming supply. It is normally the break from these lofty, panic-inspired levels that the trading opportunity lies.

The table below lists suggested seasonal trades in the Soybean futures market. Each trade has been tested for reliability, and hypothetical risk and reward over a 15-year price database. For a more detailed analysis of any or all of the trades below, please contact your Broker today.

TRADE #	CONTRACT	Signal	Entry Date	Exit Date	Total P&L	Avg P&L	Worst Draw
1	SK1	SELL	01/16/01	02/27/01	$8,637.50	$ 575.83	$ (2,475.00)
2	SK1	BUY	02/27/01	03/26/01	$8,675.00	$ 578.33	$ (1,850.00)
3	SK1	BUY	03/05/01	03/15/01	$6,475.00	$ 431.67	$ (1,750.00)
4	SN1	BUY	04/05/01	05/08/01	$13,300.00	$ 886.67	$ (1,250.00)
5	SN1	SELL	06/20/01	06/28/01	$18,362.50	$ 1,224.17	$ (2,650.00)
6	SX1	BUY	08/08/01	09/07/01	$13,587.50	$ 905.83	$ (2,350.00)
7	SX1	SELL	09/17/01	10/04/01	$13,062.50	$ 870.83	$ (1,225.00)

Please review your introduction to Seasonal Stratagems for a complete explanation of the Seasonal Stratagems service and the numbers presented above.

Seasonal trading can and should be used in conjunction with other methods of analysis. Be sure to consult the Great Pacific Trading Company Newsletter, Hot-Line and other research services for further assistance in making your trading decisions.

Disclosure of Risk: The risk of loss in trading futures and options can be substantial; therefore, only genuine risk funds should be used. Futures and options ARE not suitable investments for all individuals, and individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option would result in a futures position.

SEASONAL TENDENCIES ARE A COMPOSITE OF SOME OF THE MOST CONSISTENT COMMODITY FUTURES SEASONALS THAT HAVE OCCURRED IN THE PAST 15 YEARS. THERE ARE USUALLY UNDERLYING, FUNDAMENTAL CIRCUMSTANCES THAT OCCUR ANNUALLY THAT TEND TO CAUSE THE FUTURES MARKETS TO REACT IN SIMILAR DIRECTIONAL MANNER DURING A CERTAIN CALENDAR YEAR. EVEN IF A SEASONAL TENDENCY OCCURS IN THE FUTURE, IT MAY NOT RESULT IN A PROFITABLE TRANSACTION AS FEES AND THE TIMING OF THE ENTRY AND LIQUIDATION MAY IMPACT ON THE RESULTS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT HAS IN THE PAST, OR WILL IN THE FUTURE, ACHIEVE PROFITS USING THESE RECOMMENDATIONS. NO REPRESENTATION IS BEING MADE THAT PRICE PATTERNS WILL RECUR IN THE FUTURE.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO, ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM, IN SPITE OF TRADING LOSSES, ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS, IN GENERAL, OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

SPONSORED BY:

Commodity Trader's Almanac 2008
Scott W. Barrie
Best Price $26.37
or Buy New $26.37

Disclosure of Risk: The risk of loss in trading futures and options can be substantial; therefore, only genuine risk funds should be used. Futures and options ARE not suitable investments for all individuals, and individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option would result in a futures position.