Soybean Prices Might Surge if History Repeats Itself

By:Thomas Westwater

Soybeans hit a three-year low

  • Soybeans hit a three-year low as February trading wraps up.
  • Shorts might be exhausted as COT shows near-record positioning.
  • Trading a long call spread offers way to play while limiting risk.

Soybean prices (/ZSH4) fell 0.5% on Tuesday through afternoon trading, putting the commodity at fresh three-year lows and extending a multi-month downtrend. Since November, soybeans have been down nearly 20%, as an oversupplied market fuels bearish sentiment.

Soybean short squeeze in the cards?

As of Feb. 20, according to the most recent Commitments of Traders report (COT), speculators held 261,000 short contracts in soybeans. That was the biggest short position since May 2019, when specs were short 262,000 contracts.

Bearish pressure on soybeans may be near exhaustion, Fir a hunt, we can look at how prices behaved the last time this many shorts were in the market for soybeans. From the May low in 2019, prices rallied nearly 20% over four weeks. During that time, short speculators cut their position in half. The phenomenon is known as a short squeeze, where shorts need to buy back their positions to close their shorts as prices rise.

Soybean cot

Today, we’re looking at a possible repeat of what happened in 2019. While it isn’t a certainty, and picking lows in the market typically turns out to be a fool's errand, the extreme positioning among traders makes this play enticing, given the potential squeeze. Plus, it’s always fun to participate in a squeeze when you’re on the right side of the market.

That said, it’s important to make the appropriate play and not expose yourself to outsized losses if the thesis turns out to be wrong. After all, even if a squeeze does occur, a 2019 repeat isn't guaranteed, and the fundamentals remain bearish.

According to the USDA’s latest oil crops outlook report, soybean’s season-average farm price was cut 10 cents from the month before $12.65 for the 2023/24 marketing year due to extreme competition from Brazil and weak export expectations. The next big market catalyst for grains will be on March 8, when the USDA’s World Agricultural Supply and Demand Estimates (WASDE) crosses the wires.

Trading soybeans

In this case, a defined risk trade makes sense, especially for those who don’t have very large accounts.

An example would be Katie’s trade today, buying the April 26 1,1130 call and selling the 1,1150 call. This trade, as of Tuesday afternoon, cost 9.875 to put on with a 54% probability of profit (POP) and a max profit of $506.25 and a max loss of $493.75.


Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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