New-crop November soybean futures prices have been in a holding pattern lately on either side of $12.50 a bushel as market participants bide their time ahead of the 2013 crop’s most critical and rain-dependent developmental phase during the first half of August.
But judging by the fact that there are nearly four times as many option bets that prices will fall roughly $2.50 from current levels than will climb by that amount, most traders at this juncture appear convinced that the developing U.S. crop will get the rains and growing conditions it needs to fulfill its potential and meet current output projections.
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Record-high estimated plantings combined with broadly favourable weather thus far in the growing season have spurred U.S. Department of Agriculture crop forecasters to project a record 3.42 billion bushels of soybeans to emerge from U.S. farms this fall.
Given that domestic inventories would more than double under that scenario, such a massive haul of fresh supplies would likely have a negative influence on prices.
But given that we are still weeks away from the U.S. soy crop’s most critical period, all crop forecasters admit that forthcoming weather conditions during the first half of August remain the chief determinant of crop-size potential.
As such, most traders have adopted a wait-and-see approach with regard to price forecasting, and will adjust expectations based on updated weather forecasters nearer that critical time frame.
That said, some traders have already laid down their bets for prices to jolt one way or the other out of the currently tight sideways trading band.
Some clearly expect prices to push higher, and have purchased call option contracts that will only appreciate in value should the underlying futures market veer sharply above current price levels ahead of the November contract expiration. Such a scenario would likely only occur if the August weather conditions turn hostile toward the developing crop and deprive the emerging soybean pods with sufficient moisture to fill out to their potential.
And these bullish positions are not merely confined to strike prices modestly above current levels. More than 7,000 contracts are in place at the $17 strike price, which would require a more than 30 per cent advance in November futures prices before having a chance of entering “the money” in terms of option payout potential.
But a greater number of traders seem to be banking on the U.S. crop getting all the rain it needs, with more than 35,000 put options in place at the $10.00 strike and a further 17,000 in place at the $9 strike, which is close to 30 per cent below current futures values.
Additional pockets of potential selling interest reside at regular price intervals below current prices, which could well add waves of additional bearish market energy to any downward grind in prices over the coming weeks.
As bearish as the concentrated clusters of bearish put options located under current market prices may seem, they could also be viewed as potentially bullish should market sentiment reverse and prices push higher.
Options market positions can often reflect the prevailing sentiment and positioning in the futures realm, and so the bearish strategies being deployed in options could well indicate a preponderance of short positions in the futures arena.
And the recent trend in open interest in the November futures contract does indicate that traders have been building short exposure to the market, with open positions climbing over the latter half of June as prices declined from more than $13.20 a bushel to roughly $12.70.
This build in November futures open interest is counter to the trend seen in soybean futures open interest as a whole, which declined by more than 100,000 contracts from mid-June to mid-July as advances in soybean planting progress were made and traders opted to exit long positions in old crop soybeans ahead of the July contract expiration.
But the fact that new positions have been initiated in the November contract as prices have been on the defensive suggests a growing number of traders are anticipating new crop soybean prices to drift lower as the growing season rolls on. Should those traders be proved wrong, and prices instead push higher, then a round of short covering will likely unfold as those traders scramble to buy back those previously sold contracts, which would naturally help to propel prices higher still.
For now, options market activity suggests most traders are confident that the U.S. soybean crop will encounter broadly friendly growing weather for the remainder of the growing season, and that new-crop prices will follow a downward path as harvest approaches in the fall.
But any change in weather conditions towards a more intense and dry heat could spark a change in options market strategies and bias, which in turn could be a leading indicator of what may unfold in the futures realm soon after.
Gavin Maguire is a Reuters market analyst. The views expressed are his own.