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Traders flag three key tests to soy rally, as prices hit 22-month top

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Next week will bring the first of two key tests to the "epic" soybean rally from the June calendar, amid a debate about the extent to which La Nina concerns can continue to support prices.

Mike Zuzolo, at Global Commodity Analytics, urged soybeans to "be prepared to hedge" before next Friday brings the June edition of the US Department of Agriculture's monthly Wasde crop supply and demand report.

Estimates in the Wasde set global benchmarks for agricultural commodity investors, and the report have a rich history of causing large swings in crop prices.

Mr Zuzolo said that "while I'm not calling a top in this market", technical factors "are working against this [soy] complex unless the USDA 'feeds the bull' fundamentally on June 10", by making price-positive adjustments to soybean supply and demand estimates, Mr Zuzolo said.

Month-end test

At Chicago broker RJ O'Brien, meanwhile, Richard Feltes highlighted the prospect on June 30 of a USDA report on crop sowings - amid ideas that farmers may have planted more soybeans than suggested by USDA survey earlier in the year.

The month-end report "may trigger a… retreat" in soybean futures, he said, flagging expectations that the June soybean sowing figure will come in above the USDA's initial figure of 82.2m acres.

Delays in some states in sowing corn, which has an earlier planting window, and the relative prices of the two crops are viewed as likely to boost area allocated to the oilseed.

The ratio between November soybean futures and December corn futures, viewed as an indication of which crop will offer the better returns "has been on the increase since the end of February, and went to 2.75 on the day of the May Wasde report", said Mark Welch at Texas A&M University.

The soybean-corn price ratio stood at 2.60 on Friday, remaining above the 2.5 level that Dr Welch said indicates "equal returns from planting soybeans or corn".

'La Nina premium'

However, Mr Feltes said that a retreat in soybean prices after the June 30 report would likely prove "temporary", flagging the potential for support from seasonal concerns over the possibility of harsh summer weather – fears which this year have gained an extra leg thanks to the prospect of La Nina weather pattern setting in.

"It will be difficult for soybean market to post sizeable correction until late July/August weather pattern is clarified," Mr Feltes said.

Mr Zuzolo said that the "La Nina premium" in soybean prices "is unlikely to be maintained without continued production-negative weather after June".

La Nina debate

La Ninas have a history of causing weather disruptions, and are linked to poor crop yields in many areas.

"La Nina often means dry conditions in several major crop regions of the world, the Americas in particular," said Tobin Gorey at Commonwealth Bank of Australia.

"The US Corn Belt and the Plains to the south in particular are likely to see drier and hotter conditions."

The latest great US drought year, in 2012, came at the tail end of a La Nina period.

However, some observers believe that the risks of La Ninas to US soybean yields are overplayed.

Broker CHS Hedging said that graphs from NOAA, the official US meteorologist, suggest "that La Nina has no effect on US weather in the June through August time frame".

Societe Generale this week sayd that its research suggested that the USDA's current estimate of 46.7 bushels per acre "fairly reflects" the potential for a La Nina occurrence.

'Epic move'

The comments came as soybean futures for July on Friday hit $11.69 a bushel, a 22-month high for a spot contract, helped by what Brian Henry at Benson Quinn Commodities termed "follow-through buying on this epic move".

Soybean futures have soared by more than one-third in three months, with concerns over Argentina's rain delayed, and reduced, harvest seen as the initial spark of the rally.

However, Mr Henry added that "I would not be surprised to see some profit-taking" later in the session, ahead of the weekend, and the publication of weekly data on fund positioning expected to show that speculators already have a huge position in soybean futures and options.

The July contract indeed eased to stand at $11.38 ¾ a bushel in mid-morning deals in Chicago, a drop of 0.5% on the day.

By Mike Verdin

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