It’s no secret the commodity markets have been adversely affected by the global financial crisis. Not only has demand plummeted for many commodities, but additional selling pressure has come from massive hedge fund liquidation. Add in a deflationary psychology and a stronger-than-anticipated dollar, and it’s no wonder a host of commodities, from cotton to copper, have registered multiyear low prices this month.

Yet there’s at least one commodity (although also trading in a multiyear low range) that’s refusing to trade below its October low price. This commodity has basically stopped moving lower, instead moving essentially sideways over the past four to five weeks. This is a sign of relative strength, and when the outside markets stabilize, I see a number of reasons why this particular commodity should surge. It’s a market with compelling fundamentals and my current favorite for longer-term accumulation--soybeans.

In this issue, we’ll discuss the extremely bullish soybean fundamentals that I predict will jumpstart a dynamic and profitable bull run.

Today the soybean market is range-bound, as evident on the daily chart below. However, at some point the market will break out of this range:

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March 2009 Soybeans
 
 
Source: Commodity.com

Let’s begin with my premise and belief that the US government is overestimating the soybean supply size. A few months ago, on Friday, Sept. 12, the September soybean contract was squeezed nearly $3 a bushel higher. This was the last day of trading for the September contract and a one-day record price surge. I wrote about this at the time.

The time of the squeeze was at the end of the previous crop year, and the US Dept of Agriculture (USDA) had estimated (a relatively tight) 140 million bushels of soybeans were still available. Although the USDA still hasn’t revised this number, apparently the shorts in the September contract were unable to put their hands on any of these 140 million bushels to deliver, and instead had to cover their shorts at the prevailing (squeezed higher) market price.

The September Soybean Squeeze

Source: Commodity.com

At the time the September futures contract was squeezed, this year’s soybean harvest hadn’t yet begun. Today the harvest is over, and new crop supplies are therefore available to the marketplace. The existing soybean stockpile is still overstated in my opinion (because that 140 million bushel carry-in supply from the last crop year was overstated), but today’s supplies have been replenished by the harvest, and there won’t be another short squeeze--at least not until the current harvest replenished stockpile runs out (which I see happening).

To bring you up to date, let’s discuss the November crop report. Prior to the release of this report, traders were anticipating a reduction in the overoptimistic yield estimates from the previous (October) report and therefore a reduction by the USDA in its estimate of the carryover supplies. Carryover stocks (what’s left over at the end of a crop year) were projected to rise slightly for this crop year from last year’s 140 million to 205 million bushels. These numbers represent a barely adequate supply.

Yields were reduced slightly on the November crop report, but despite a slightly lower crop size, the USDA did not reduce the carryover (ending supplies) estimate. The explanation was exports would be lower this crop year due to the global recession. However, this explanation does not hold water. The crop year begins in September, and only three months (or about 25 percent) into this crop year, already more than 50 percent of the government’s total export projection has already been reached.

The reason is China. China accounts for about half of our soybean exports and has been buying at a record pace this crop year. The USDA is assuming that, because its growth is slowing, China will be importing less of everything, including soybeans. I don’t buy it.

First of all, China may not be growing its GDP as fast as last year, but it’s still growing. Seven percent growth, although small by Chinese standards, is enviable in the rest of the globe. And the demand for better food is much more inelastic than demand for other commodities. Soybean meal is used for animal feed, and the Chinese pig herd is 16 million head larger than a year ago. Trends like this can’t be reversed all that easily.

It’s true that China’s economy is slipping, but the argument that the central government will allow higher food prices just doesn’t make sense. China has the cash reserves to maintain a robust soybean import pace, and this makes the US government export figures way too small. And if these numbers are too small, a 205 million bushel carryout is too large. If the carryover from last year was overestimated by at least100 million bushels, as I believe it was, and is again overestimated this year by another 20 million to 50 million, the actual carryout supply will be very small indeed, and could be near zero by the time this crop year ends on Aug. 31, 2009. Of course, this won’t become evident until 2009, but I can envision sharply higher soybean prices required to ration extremely small supplies next year.

What about South America? Right now old crop South American soybean supplies are virtually sold out, and US exports should remain robust into at least late spring 2009. The soybean bears will argue that US exports will slow later in the crop year when the new Brazilian crop becomes available.

Traders are also looking for a reduction in the estimate of the Brazilian crop. The Brazilian government had previously said the global credit crisis would have a negative impact on soybean farmers this year and result in a smaller crop. The USDA didn’t reduce the Brazilian crop estimate, but private forecasters have done so. Yields will be lower in Brazil this year without weather problems. However, at this early stage in the crop year, there’s already evidence of potential drought in southern Brazil and much of Argentina. This would have been a big story for the soybean market in any other year, but in this year of market meltdowns thus far this story has been lost.

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Argentina is planning to increase planted acreage this year, and if there’s a shortfall in Brazil it will need to be made up by Argentina. However the early dryness in southern Brazil thus far has been an even bigger problem in much of Argentina. The unfavorable dryness in Argentina to date has been just about as dry as it’s ever been at this early stage in its crop year. They’re just planting right now and the weather could change, but this situation will need to be monitored.

I’m not looking for a dramatic turnaround anytime soon in the stock market, or even in a number of other commodities. However I can envision the outside markets at least stabilizing. It will only take a little stability to jumpstart a dramatic and sustained bull market in the soybean market. And when the world begins to recognize the US is running out of soybeans next year, I envision an accelerated trend to the upside will unfold.

If you're interested in receiving specific trading recommendations in the soybean and other commodity markets, consider George Kleinman’s subscription letter Futures Market Forecaster.

Risk Disclaimer
Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the "Holy Grail." Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

Hypothetical Performance
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.