(Reuters) – A short position in soybeans has been one of the top trades of the commodities arena so far in 2014, outperforming crude oil, cotton and corn, as prices fell roughly 25 percent since the start of the year and 30 percent since July 1.
But recent sharp cuts to market open interest as well as non-commercial short positions suggests speculators are starting to cover those shorts ahead of the end of the year and as the strongest period for U.S. soybean exports gets underway.
Since peaking at more than 820,000 contracts on October 13 – a two-year high – soybean market open interest has declined by more than 100,000 contracts, or around 12.6 percent as traders bought back previously sold contracts. Front-month soybean futures have rallied roughly 60 cents a bushel since their open on October 13.
Data on trader positioning compiled by the Commodity Futures Trading Commission also suggests a short-covering spree is underway among the speculator community. Non-commercial short positions have dropped from a multi-year high of over 216,000 contracts in late September to around 182,000 contracts as of the latest Commitments of Traders report.
BOOKING PROFITS
Record-high U.S. soybean plantings this year after massive U.S. and South American soy crops last year fueled the broadly bearish stance in the soybean market this year and helped drag prices lower for the past several months.
But now that more than half of the U.S. crop has been harvested, traders have started to unwind their shorts in anticipation of steady-to-firmer price action for the remainder of the year.
The seasonal pick up in soybean export market activity has also sparked a dial-down in soybean shorts, as China and other large importers typically conduct strong purchase deals at this time of year once abundant fresh supplies become available and as prices tend to trade near their lows for the year.
SIGNIFICANT SHORTS STILL IN THE GAME
With more than 181,000 contracts still held by speculators on the short side of the market, there remains significant room for additional short covering in the weeks ahead.
Indeed, even after the roughly 40,000 contracts of short covering seen since the start of the month in CFTC data, the remaining short position is still by far the largest short exposure held by non-commercials for this time of year.
That suggests traders remain vulnerable to a short squeeze should either consumer demand come in stronger than expected or actual available supplies fall short of the levels anticipated.
So far, the supply side of the story looks to be sticking to the well-defined narrative of the past several months. The latest harvest reports from the top growing areas indicate crop yields are at or above expectations, and that a record-high average yield remains likely once the final accounting is complete.
What’s more, although U.S. farmers who may not like the current price can potentially lock away portions of their new crop in their on-farm storage facilities, they are facing an even stronger motivation to store their corn instead due to the stronger ‘carry’ in corn relative to soybeans.
The current structure of the corn forward market suggests farmers who can store rather than sell their new corn can receive prices more than 10 percent above current values a year from now, and more than 17 percent higher by the summer of 2016.
In contrast, while a 2.6 percent premium can be captured by farmers who hold off their soy sales until next summer, soybean prices for the harvest of 2015 are actually below current values, and lower still by the following summer.
Many growers, as a result, likely will be forced to sell large chunks of their soybeans rather than keep them, which should keep fresh supplies flooding onto the market over the near- to medium-term, and limit the likelihood of a sustained short squeeze.
At the same time, strong planting progress is being made across South America’s top soy growing region, elevating prospects for yet another bumper crop from that region early in 2015 should weather conditions remain non-threatening through the growing season.
On the demand side, the U.S. export season is clearly in full swing, with Chinese traders booking in excess of 2 million tonnes of soybeans in each of the past two weeks, which has helped underpin soy prices and basis levels in recent days.
However, with China’s soybean stockpiles above where they were a year ago, and domestic crushing margins below year-ago levels, it is doubtful Chinese traders will sustain their recent strong purchasing pattern in the manner seen a year ago as tight supply pipelines were replenished following the 2012 drought.
While speculative traders are likely to continue unwinding their large short positions in the soybean market in the weeks ahead, they are unlikely to feel any urgency to do so all at once any time soon and could maintain a sizeable short stance heading into 2015.
