April 20, 2009

Bullish fundamentals have driven soy futures to six-month highs, but with gains tied to Chinese demand and Argentina uncertainties there may be roadblocks ahead to derail the rally.

Soy futures definitely have strong fundamentals beneath it, but a market can get ahead of itself and overdo price moves, said Bill Nelson, analyst with Doane Advisory Service in St. Louis. Nelson said the market has to be careful that it has not discounted a lot of the bullish expectations in regard to exports, end stocks and new crop outlooks.

"This week alone, there have been private estimates of old crop end stocks falling to 100 million bushels, about as extreme as you can get, and those type of outlooks can force traders to discount prices as far as you can," he said.

US Department of Agriculture estimated 2008-09 US soy ending stocks at 165 million bushels April 9.

The market has priced in a lot of premium in an attempt to ration demand. Analysts view this as a touchy situation for market bulls. If the market reaches a point where export demand slows, corn planting delays attract more US soy acres and domestic demand remains sluggish, the door opens for prices to retreat.

"You have to gauge the fundamentals, momentum and technicals to determine how long the bull run will continue," said Greg Wagner, analyst with AgResource Company in Chicago.

One of the first things that could take the wind out of the sails of bullish traders is a reduction in Chinese demand. If China says it has bought all it needs, prices will start to retreat, Wagner said.

The export demand baton usually is passed from the US to South America at this point of the year.

China purchases of US soy for the 2008-09 market year are the largest of the five main world buyers of US soy at 38 percent greater than year-earlier levels. The remaining four largest buyers are all showing smaller purchases than year-earlier levels with the EU-25 down 37 percent, Mexico down 28 percent, Taiwan down 9 percent and Japan down 8 percent, Allendale Inc. analyst Joe Victor wrote in a market note.

A significant point is that of the total accumulated 2008-09 export sales of US soy of 29.098 million tonnes, China accounts for 16.701 million tonnes, or 57.4 percent, Victor said.

The Allendale analyst said the markets wonder if China will continue to hang with the US as a supplier of old crop soy or direct more of its attention to South America's new crop harvest

New crop futures have followed nearby contract's rise to higher levels, but a change in planting intentions could take some of the market's bullish edge off prices.

NOAA forecasts for above-normal rainfall in the US Red River Valley through May could delay spring wheat plantings. That could attract more soy if corn and wheat acres are scrapped, Nelson said.

Other factors that could derail the bullish trend are strong yield potential from favourable long range weather outlooks and the continued recession that is reducing domestic soy product usage, Nelson said.

Technically, the market is starting to show signs of upside exhaustion and overdue for a modest correction on technical charts.

One independent technical analyst said from a shorter-term perspective on the soy charts, a rather consistent pattern has developed over the past several months. "Prices have tended to trend for about five or six weeks and then reverse the trend," the analyst said.

The soy market has just finished a six-week run to higher levels.

If the shorter-term price cycle continues in the coming few months, "soy that have been trending higher the past several weeks are now due to reverse its uptrend and begin downtrends into the late-May, early-June timeframe," the analyst said.

Much of the rally for US old crop soy futures, however, stem from Argentina and China. Argentine has declining 2009 Argentina production and political discord and China continues to make stronger-than-average purchases of US soy. Until some of these factors change, futures will remain firmly underpinned, said Victor of Allendale.