Soybean Seasonal Stratagem

| Overview | Production | Consumption | Major Issues | Seasonality |
|Seasonal Charts | Sample Stratagem | Preview Order Form |

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 2001

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)

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 2002 

Two themes which may be of major importance in 2002 are Supply and Usage. 

Given the advent of a recession in 2001, which will most likely continue into 2002, the usage side of the supply/demand equation looks very questionable.  One of the major factors in the grain trade of recent years, has been huge demand, chasing huge supplies.  As the old grain trading moto goes “big crops make big demand.”  In recent years, the usage of grains has grown tremendously, albeit at a slightly slower pace than expansion in production.  However, with a recession building, a prolonged bout of economic weakness could seriously wreak havoc with the demand side of the equation in 2002.  If we see the increased production world wide which we have seen in recent years, and the slow down in usage appears, then prices could retest levels previously unseen.  One has to remember, something is only worth what someone is willing to pay for it, and therefore prices can go much lower than production costs, especially in the grains where the government supports prices – at subsistence levels at best.

For the last several years, grain production has increased dramatically – especially in Corn and Soybeans.  This increased production, has been due to increased effectiveness of farmers, using the latest technology and equipment to produce more bushels per acre.  Great weather for growing has not hurt either !  As explained above, however, usage has been increasing at a slightly slower pace to the production increases.  Given this scenario, any serious threat to the crop could result in a case where the market fears too much demand chasing a limited supply.  However, usage increases are not a given, with the current state of the US and world economies.

Based on the above, we feel that 2002 has the potential to be either a totally lack-luster year – based on normal growing weather and static demand, or poor growing conditions met with decreasing demand – or a very strong year, if production problems develop and usage patterns continue to increase or at least stay steady.

Historic Price Overview

Soybean prices - as measured by the nearest to expire futures contract – ranged from $4.20 ½ to $5.38 per bushel in 2001.  The low made in October of 2001 was higher than the low made in July of 1999 at $4.01 ½ per bushel, but the high of the year was also lower than the high in 2000.

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 $4.20 ½ made in October ’01.  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”

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

 

• 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.)

 

• 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 Great Pacific Trading Company Broker today.

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.