Several commodity markets are poised for well-defined up-trends this year. I plan to write about these markets on a bi-weekly basis as the views presented here are more thematic and longer term in nature. Updates to the trading strategies published here will be provided on an ongoing basis. In this issue, I will be focusing Sugar and Soybeans.
In the past week, the lack of a trade agreement with China leaves fund managers as aggressive sellers of commodities. Corn, Wheat and Soybeans all printed contract lows this past week. Weak china demand for Soybeans leaves the US and World stocks at record highs and we have set a new short record in the Commitment of Traders report at -140,424 contracts for non-commercials. Funds are aggressive short here.
No trade deal this week with China and the increase of 25% tariff on $200B of Chinese goods started last Friday. The markets will likely assume a trade war until there is a deal and Trump is threatening another 25% tariff on remaining Chinese goods in three weeks if no deal is reached.
There are major implications across the globe if we see a trade war and another 25% tariff increase. First expect CNY to be very bearish, we will have risk of a global recession and downside risk to most economies. Chinese markets would be bearish and would likely test the 2015 lows. In the US, expect a slow down, cyclicals would be bearish. Small caps should see a bear market in this environment.
No one wins in a trade war. The net take away from the talks last week was that they were constructive. The market is pricing in a trade war so any progress can create a big short squeeze using the funds record short positions as fuel. Mind your risk in this environment as there is a head line minefield that we are currently in that will last until we see an agreement.
Please see the past issues of the Commodity Advisory Newsletter for more information on the China Tariff situation and commodities covered here on The Art of Chart.
There has been a large supply surplus in Sugar of over 9 million tonnes in 2018 and until now, not much has changed in the fundamentals. We have been short Sugar this year and The Weekly Call is currently holding a short trailer with 2/3s of the position closed and 63% profit on margin so far.
Sugar fundamentals have been bearish for some time but are about to shift bullish. The graphic below shows global production in metric tons for 2018 with Brazil the leading producer in the world. Not much will change in Brazil this year in terms of production but India and Thailand are expected to come up short by about 10% each. This means that unless something changes we are likely going to see a global production deficit of 3-4 million tonnes.
Looking at the charts, there is no low setup in place for a buy, but we are entering a low timing window and as time and price come together, I am expecting a reversal in the next week or so. The four hour chart below shows that we almost have positive divergence on RSI and the timing window is centered on May 16th. The daily chart shows a nice setup using the COT report with commercials net long and funds and retail net short. A lower low on RSI will set up positive D on RSI and signal an initial entry. I am expecting a rally into August according to my price and timing work of $13.00.
I want to give myself some time on this trade and am considering an entry in the October contract. In October, consider buying the 12.50 call and risk 50% from your entry or consider buying a naked futures position after a conversion of 11.85 into support with a price objective of $13.00. Risk no more that 50 ticks from entry. Keep your size small for now as the turn here could take some time to base and reverse.
In the 2018/2019 period, over 150 million metric tons of soybeans were imported globally. China was by far the leading importer of soybeans, with an annual import volume of 88 million metric tons in that year. As of March 2019, the production of soybeans in the U.S. was forecasted to reach some 123.66 million metric tons in 2018/19 and the US is the largest producer of Soybeans.
The chart below shows exports from the US in 2018. China by far was the leading importer of Soybeans from the US with about 32 million metric tons. It is not hard to understand why the fall in Soybeans prices. China, the leading importer in the world, has drastically cut back imports from the US and is currently down about 8% from the pace set in 2018. The US and World ending stocks are at record highs and the Soybean market is extremely oversold.
Soybean products are often used in animal feed stocks and estimates for ending stocks are base on the African Swine Flu crisis and the reduction in Chinese Lean Hog stocks as mentioned in previous Commodity Newsletters. The open question that remains is US yields. Do yields come in close to last years averages? If they come in lower, then ending stocks will fall and prices will increase. In the last two weeks, China has cut back it’s near term imports of Soybeans from the US. Is this as a result of the Lean Hog crisis and is this reduction a true demand reduction or is it part of the ongoing tariff negotiation?
The latest COT data shows a new record short position for Funds and a new record long position for Commercials. Any change in the current market dynamic and we are set up for a short squeeze using the Funds as fuel for the rally. We will need a catalyst to initiate this squeeze, like a trade deal or perhaps planting or yield issues in the US.
Looking at the chart, we now have positive D and likely will see a lower low first before the declinng resistance trend line is broke. Enter this trade with caution as lower prices are still possible. The setup we want it a broken trend line and a retest that holds, the low. Long term support of 830 needs to be converted to confirm an up trend. Looking into the end of June for the next high window.
I am waiting on the setup in Soybeans and when I see the trend line break and a low retest, then I will put on a bracketed futures position. Likely a long October future, with a long put at 800 and sell the 850 call. Use the short call to be in and out of depending on what price does. Another option, upon seeing a reversal pattern look at a 70% delta call in the October contract and risk no more than 50%.
The trading strategy review below has a summary of trades based on the Commodity Newsletter and also The Weekly Call. These trades are posted on our private twitter feed and further discussed each week on The Weekly Call which can be found HERE.
I will continue to cover thematic trades in the commodity world in this newsletter and will continue to update the trading strategies below. My next newsletter will be in two weeks and will likely focus on the Soft sector. Until then, Trade Smart and Trade Safe.
Trading Strategy Review
The trading strategies below represent positions taken by this newsletter and shorter term positions covered by The Weekly Call. See the Weekly Call for the latest updates to these positions.
Disclaimer: Trading futures contracts and commodity options involves substantial risk of loss, and may not be appropriate for all investors. By reading this report, you acknowledge and accept that all trading decisions are your sole responsibility. Trading strategies referenced in this document are only suggestions, no representation is being made that they will achieve profits or losses. Past performance is no guarantee of future results.