Soybeans Trade Lower on Supply Fundamentals

10/04/2012 8:30 am EST

Focus: FUTURES

The recent highly publicized drought in the Midwest has been widely predicted to raise prices, but Dennis Cajigas, senior market strategist at Zaner Group, shares why that hasn’t happened.

November soybeans (ZS X2) traded lower as a combination of strong yields, record harvest pace and increased producer selling pressured prices lower. Monday's weak trade demonstrated a rejection of Friday's price rally where spillover support from inter-market spreads lead the Soybeans to rise above $16.00 per bushel despite an inherently bearish quarterly grain report. The market's price break back to and below pre-report levels reflects that supply and demand factors have triumphed. Fresh demand news is likely to be sparse this week as Chinese markets will be closed for the holiday. They are reported to be bidders of nearly 60% of recent exports. Additionally, favorable weather patterns expected throughout the week in South America will ease dryness concerns as they begin their planting season. In Brazil, Rio Grande is expected to get good coverage over the next two days with about 1 to 3 inches locally and about .5 overall. Argentina is also expected to receive about .5 in southern areas near Buenos Aires and La Pampa. The rain in Argentina may delay planting in areas if the showers last throughout the week.

Technically, the Soybeans are attempting to close a gap near the $15.50 level as well as another back-and-fill between $14.74 and $15.26. The recent trend is lower however, the downward momentum may begin to wane here especially if the trade has failed to close below the $15.00 support level. Although new recent lows were posted Monday on strong volume, which indicative of strong selling, the open interest remained relatively unchanged. Thus, Monday's market action was likely long liquidation as opposed to fresh short entering the market.

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Support: $15.50 major, $15.00 major, $14.70 major, $14.30 minor
Resistance: $16.00 minor, $16.40 major, $17.00 psychological

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Traders expected a small possible corrective on "Turn around Tuesday" trade however, the market is likely to continue lower into the end of the week.

by Dennis Cajigas, Senior Market Strategist, Zaner Group

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