As the calendar moves towards the end of March, the all-important US Planting Intentions report will be coming due. That will provide us an insight into the “intentions” of farmers when it comes to what crops they will plant this year. From that, we can get a sense of the total amount of acreage that will be devoted to each category of the grains/beans and thus try to get a sense of the total supply based on trendline yield estimates.

Soybeans in particular have put on almost 60 cents since the beginning of March based on several factors but notably among them is the palm oil market. El Nino has reduced the yields and thus the supply and this in turn has driven bean oil prices higher. That in turn has tended to bring some buying into the beans themselves.

It has been my experience that Oil-led rallies in the beans rarely hold. They need Meal rallies to drive them higher.

There remains at this time more than abundant supplies of beans both here in the US and down in S. America as their harvest season is commencing and will be ramping up over the next couple of months. Reports are that there has been heavy farmer selling of beans here in the US as the price has rallied on the nearby bean contracts.

Thus we are in a situation where a POTENTIAL trade on the beans might present itself. I say “potential” because it has not yet been confirmed.

Looking at the continuous chart, you can see that $9.20 has been a top in the bean price going back into early August of last year. The flip side is that the market seems to have built a decent demand base down below $8.60.

Zooming in a bit closer, until the rally breakout this month, the beans ran into selling near $8.90 and buying below $8.60 for all of this year.

The stochastic indicator, which is a range-based indicator and not a trending indicator, is at an extremely overbought reading for the beans going back into early next year. It may very well be ready to rollover.

As price is not far off from $9.20, and the stochastics are close to generating a sell signal, traders might want to be alert for a possible short sale up here. The upside risk would be a push through $9.20 with the potential for a move back towards the bottom of the former range somewhere near $8.60 or lower. That is a decent risk/reward setup.

There are several things working in favor of a short sale – a stronger US Dollar makes US beans less competitive on the global markets. Additional farmer sales of last year’s stored harvest and commercial entities which would use a rally to hedge inventory/purchases, etc. would tend to limit the upside.

Things that could result in a further price rise would be a bullish surprise in the upcoming Intentions report ( Less acreage planted) or an adverse shift in the weather pattern.

Side note – The window for planting beans is much wider than that of corn so a rainy start to the planting season might actually be negative the beans if it actually ended up seeing acreage shift to beans and away from corn.

A possible way to play this would be to sell the beans and get some upside coverage in place with a series of bull call spreads against that. Weather driven rallies in beans see call option premiums soar thus ownership of some calls against a short futures position would provide some protection in the event of a bullish surprise and allow one to manage a position without dealing with the stress involved in weather markets.

If you notice the Stochastics indicator shown on the chart, it has been pretty good at getting one positioned on the correct side of a trade over the last 6 months or so. Markets tend to remain in ranges more often than they trend so if that is the case for this growing season, there might be some profitable opportunities in the beans. For those who have never traded soybeans – they move and sometimes in a big way so do not grow careless.

Make certain you exercise good money management practices and above all, if the “D” word ( no, it is not ‘damned’ but rather “Drought” ) surfaces in any commentary due to a weather forecast shift, get out of the way!