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Could Soybean be a yield play?

The outlook for Soybean prices looks to have stabilised as the global supply glut in 2014 seem to be working its way through the system. This commodity has held up better in price against its other agriculture commodity peers after their late collective 2Q surge. Relative to the price of Corn and Wheat, Soybean has given up only a third of its almost 15% surge versus the rest which has lost an average 50% of their June spike. A key reason supporting the price of Soybean is the increasing dominance of Chinese imports for this commodity. Domestic demand in China has far outstripped domestic production and supply. For example, China supplied 17.1% of their total domestic use in 2012, while the consensus is for it to meet only 12.1% of its domestic demand by 2016. A key impetus for this huge demand is the increasing use of Soy for animal feed due to its better cost-benefit for livestock producers in China.

Other supporting factors for Soybean

With China accounting for more than 60% of the world’s import of Soybean, this backdrop could set the stage for a firmer price support for Soybean, especially with China on a vigorous mood to sustain its 7% GDP growth rate. Another driver for its firmer prices may come from the impact of a “strong” El Nino pattern this year based on forecasts from most weather watchers. With the US tagged as one of the largest exporters of Soy, the cooler and wetter El Nino impact on the US farming belt may put further pressure for Soy price to climb right about the time when the new season of crops are set for planting. The chart on Soybean looks like it may consolidate in the 920 to 1065 region for a little while, with the 940-950 range offering strong support- at least until the next USDA report due out next week on the 12 August. A further look at the cash product for Soybean also reveals that there is a positive carry of up to 20.85% for a long position on Soybean – Cash. This is due to the pricing process for this commodity which is currently represented in a state of backwardation. Forward contracts for Soybean are priced at a discount to spot prices as the current state of supply shortage is reflected in today’s prices.
 



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