Thoughts on the Bean Market

Continuing a six week rally fueled by export demand from China and fund buying, front month beans touched a 2 ½ month high today before selling off in the second half of the day. Rumors of 6-7 cargos of US beans ordered by China drove up prices in the early part of the pit session before a report from a state backed market information provider reported that Guangzhou customs authorities found ten cargos of beans to contain a virus, sparking profit taking by longs on fears future shipments would be delayed or rejected. While the rally has caused Midwest spot prices to flirt with six month highs, the increase is due to pure price movement as basis remains at the same to slightly lower levels over that time frame.
While Chinese imports for several raw goods have increased, I am skeptical that China’s economy has turned the corner yet and will continue to drive demand throughout the year. Fund buying has been driven by the rally in equities and increased risk taking across the board. None of you need to be told that fund money can shift like the wind, nor how strong of a wind it is. Bean futures are now technically overbought to the extent as they were in late December. Additionally, May futures speculative positions are net long more than 3x the open shorts as we enter the last seven days of trading on the May option. Given these circumstances, it may be a good time to take a short May beans punt via writing calls on volatility spikes or shorting futures on price spikes.
The finding of the bean pod mottle virus in Chinese cargos is interesting, in that it brings forth the question: Do the Chinese want to limit bean imports? If it is in China’s interest to delay shipments, this will certainly be used as the reason. I am of the opinion that the Chinese have been and continue to quietly do what they can to forestall unrest in the populous, particularly in rural areas. On a time frame of several months, this includes boosting food stocks, which would explain the surprising Q1 demand for beans. Another part of quelling unrest is putting cash in the hands of those in the countryside.
The Chinese government has pursued both of those options through purchasing domestic beans for its stores at a market premium price of 3.7yuan/kilo ($6.83/bu). These purchases, however, are limited to higher quality beans, growers with beans that don’t measure up the quality standard must sell locally at a lower price. In the chief bean growing area of Heilongjiang Province, growers are blaming imported beans for the fall in price from a July ’08 high of 6.0yuan/kilo to the current market price of about 3.25yuan/kilo. Heilongjiang oil fat producers, a major buyer, are claiming that 3.3yuan/kilo is their breakeven price and that they cannot buy local or imported beans at that price. While slowing imports and thus raising bean prices would normally help growers and hurt oil fat producers, netting out any benefits, food oil prices have been on a massive rally driven by tightening supplies in the palm oil market (Indonesian palm oil futures are up 45% from the beginning of the year).
The meaning of all this? Higher oil prices mean oil fat producers have a higher breakeven, and thus higher bean prices can send some money to all levels of the soybean industry. If food oil prices remain elevated (or the Chinese think they will) then by slowing bean imports Chinese officials can not only increase cash flows to bean growers and crushers but quell the unrest caused by imports at the same time.