The phase-one trade deal between the U.S. and China announced in mid-January should create frequent opportunities for soybean traders to make money. What it won’t do is create a bull market for the grain.
“The strategy would be to buy on the breaks,” says Shawn Hackett, president of Hackett Financial Advisors. “You have to be opportunistic is the point.”
Buying on the dips and selling on the rallies might be far more profitable than a buy-and-hold strategy. Traders should consider buying active-month soybean futures when they dip close to $8.50 and then sell as they near $9.50, says Hackett. “That’s a dollar, which is a nice trade,” he says. A similar play is with the
Alternatively, traders could buy call options on futures contracts when the soybean price dips nearer to $8.50. These contracts pay out when the price of soybeans rallies. Futures contracts for soybeans were recently fetching about $9.17 a bushel on the CME.
Hackett’s suggested trading strategy makes sense given that the trade deal, which requires China to buy $32 billion worth of farm products from the U.S., will probably stabilize the market for soybeans rather than create a bull market. “We are in the camp that says the deal doesn’t turn the market bullish,” Hackett says. Instead, he sees the price bouncing around within a range.
Like most commodities, the global market determines price trends for soybeans. If demand and supply change, then prices can move in a big way. But that’s not what’s going on here. The trade war merely shifted some Chinese soybean buying from the U.S. to Brazil, which is the top global exporter of the foodstuff, with the U.S. ranking a distant second.
With a trade truce, China says it will switch back some of its buying to the U.S. Neither change alters world demand for soybeans—so no bull market. But there’s still money to be made for agile traders. Chinese buyers will probably buy U.S. soybeans opportunistically, according to Hackett. “They [the Chinese] did say very clearly that they would buy based on market conditions,” he says.
The trade agreement doesn’t say what price the country needs to pay for any farm product, including soybeans. All that needs to happen is for China to buy $32 billion of the agricultural products over the next two years. As a result, the buyers will want value for money, and thus will buy on the price dips and then not buy on the subsequent rallies.
Price data show that dips to $8.50 over the past two years quickly were followed by rallies, which means that prices probably won’t fall too far below that level. “Right now, given this deal, there should be a clear floor on soybean prices,” says Sal Gilbertie, founder of ETF provider Teucrium Funds.
In simple terms, a price fall should attract buyers, prompting a rally, at which point buyers will wait for another drop, and the cycle repeats. There are risks, including the chance of a bumper harvest, which could send prices plummeting. There’s also the possibility that Beijing fails to comply with the agreement and doesn’t do much buying in the U.S.
“[There’s] increasing skepticism about the likelihood of full compliance with the agreement,” said Lewis Hagedorn, a Pimco portfolio manager.
Still, given the vigilance of the current administration on trade matters, it makes sense to make a tactical bet on soybeans.
https://www.barrons.com/articles/the-trade-deal-wont-create-a-bull-market-for-soybeans-heres-one-way-to-play-it-51579869000
2020-01-24 12:30:00Z
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