There are two issues to look at this week in the soybean futures market. First, I'd like to discuss the seasonal pre-planting characteristics of the soybean market, how they've changed over the last ten years and what the current situation looks like. Secondly, I'd like to use this setup to explain the difference between market forecasting and trading program design with a special focus on soybeans and the market's natural fear based reactions.
This is a critical point in the soybean futures' seasonality due to the approach of the Brazilian harvest and the spring planting intentions here in the U.S. Brazilian soybean production has been expanding at unprecedented levels, setting new production records in ten out of the last twelve years. A final harvest number near projections would also keep that streak rolling. The Brazilian harvest has just begun but recent rains have already dampened the early harvest projections above 95 million metric tons(mmt) and are currently suggesting a number closer to 91mmt.
The interesting change in soybean seasonality has come as the direct result of the emergence of Brazil's dynamic growth within the agricultural markets. Their projected soybean harvest, converted to bushels is around 3.3 billion bushels compared to the record 2014 U.S. harvest of 3.97 billion bushels. They are expected to surpass U.S. total production within a year or two. This shift has turned the market from U.S. farmers selling at year end to raise money for the coming year to more farmers holding back production based on potential Brazilian harvest issues. As a result of this we see less producer short-hedging at this time of year. The end result is that we now look for the uptick in prices at this time of year as commercial long hedgers (soybean users) begin to lock in their year's usage needs. As a result of this shift, the commercial net short position has declined from a five year average of net short nearly 63,000 to a recent five year average of net short less than 50,000 contracts. We'll come back to this in a bit but you can see the shift on the chart below.
As you can see, the current position is about as bearish as it has been over the last several years. Examining this from a contrarian point of view provides a different perspective. It would appear that based on recent trading patterns, that the commercial short hedgers may be all sold out or, forward hedged. This makes sense in light of the record U.S. crop which could be joined by a record Brazilian crop as well. However, the contrarian would make two points, here. First of all, the record net short position over the last ten years is just over 83,000 contracts but, there have only been four times when the commercial net position exceeded 80,000 contracts in the last 25 years. Therefore, a better proxy would be to use the five year average of 63,000 contracts. The second point the contrarian makes is that the market is sold out ahead of the seasonally strong period, as you can see on the May soybean seasonal chart provided by Moore Research below.
Next, I want to discuss the difference between market forecasting and trading. Market forecasting is something that the commercial traders are very good at. It makes sense, the quality of their livelihood depends on the forecasts of the markets to which they're tied. Their businesses force them into the markets. Therefore, we believe their combined voice as measured by their actions in the futures markets provide a professional consensus on the prices within the markets they trade.
Forecasting is not the same as trading. Speculative traders are never forced into a market. It is this freedom that should allow the speculative trader the ability to cherry pick their trades. To this end, the development of a trading system must take into account any particular biases the subject market exhibits. The surprise factor in the agricultural markets is always higher just like the U.S. Bond market. Weather concerns are the same as geopolitical fears in the financial markets. Therefore, in designing our mechanical Commitment of Traders program, it was no surprise that the most explosive moves in the soybean markets are higher. We've built this into both our speculative and commercial soybean long trading programs.
Finally, putting it all together in a discretionary manner, we have a nearly sold out commercially hedged position ahead of significant seasonal strength. Looking at the way these factors have interacted in the past, I think its very possible that the May soybean futures put in a bottom worth trading into the U.S. planting season.
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