Soybean Meal Resumes Uptrend as Market Panic Subsides
Affected by the Greek sovereign debt crisis and the sharp decline in the Chinese stock market, Dalian soybean meal futures fell sharply last Wednesday and Thursday. However, as the risk of Greece exiting the eurozone decreased and the Chinese stock market stabilized and rebounded, the panic sentiment in the commodity market temporarily eased, and Dalian soybean meal futures resumed their uptrend. Looking ahead, the fundamentals of US soybeans remain bullish, domestic demand for soybean meal is picking up, and soybean meal futures still have room to rise.
Systemic Risk Temporarily Passed, Market Returns to Rationality
Because Greece refused to accept the EU's harsh fiscal austerity policy, the risk of Greece exiting the eurozone increased, causing the US dollar index to rise and prices of commodities such as crude oil and copper to plummet. But at present, Greece has softened its stance and its willingness to remain in the eurozone has strengthened. Coupled with support from countries such as France and Italy, the possibility of Greece remaining in the eurozone has risen. In addition, under the effect of the government's continuous favorable measures, the Chinese stock market stabilized and rebounded last Thursday. Market panic dissipated, and commodities that had been unfairly sold off rebounded quickly. Soybean meal futures, which had bullish fundamentals and had originally been in an uptrend, stood out even more, hitting a phased new high in last Friday's night session.
Although it is still unknown whether the rebound in the Chinese stock market can continue, investors who have been through the baptism of a panic selloff will be more rational, the probability of a collective plunge in commodities will decrease, and the market will give more consideration to the supply and demand fundamentals of commodities.
This Month's USDA Report Is Bullish for Soybean Meal
Last Saturday, the US Department of Agriculture released this month's agricultural supply and demand report. The report lowered US soybean ending stocks for the previous year to 255 million bushels, below last month's estimate of 330 million bushels and the market average estimate of 287 million bushels. Although the report raised the 2015/2016 US soybean planted area and production, because beginning stocks were lowered and consumption and export figures were raised, 2015/2016 ending stocks still fell sharply to 425 million bushels, 50 million bushels lower than last month's estimate.
US soybeans are currently still in the key growth period. With the good-to-excellent rating for soybean growth continuously declining, and with planting and growth progress both lagging behind last year, US soybean yields face great uncertainty, and US soybean supply may tighten further.
Soybean Meal Demand Is Expected to Pick Up
Because hog inventories have continued to decline and pork supply has decreased, hog prices have been rising continuously since March this year and have now risen for 17 consecutive weeks. According to statistics, on July 8 the average hog price in Henan Province was 16.91 yuan/kg, up 50.3% from the lowest price on March 11 and up 25.6% from the same period last year. As hog prices recover, farmers' breeding profits have turned from losses to gains. The hog-to-grain price ratio has been above the 6:1 break-even point for 8 consecutive weeks. On July 8, the hog-to-grain ratio in Henan Province reached 7.32:1. Based on this price, large-scale breeding enterprises can earn about 300 yuan per finished hog sold, while small and medium-sized farms can earn about 400 yuan per finished hog sold. Increased hog farming profits will inevitably stimulate an increase in hog inventories, and continuously declining hog feed production will usher in a phased turning point.
From a technical perspective, the declines last Wednesday and Thursday caused the excessively high oscillators in soybean meal futures to pull back, and the overbought indicators were repaired. In terms of operations, one can continue to go long on dips.