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Markets To Watch

Our Monthly Pick: Soybeans

When I first started out as a commodities broker I discovered soybeans. I spent every free hour I had studying volumes of agricultural texts on soybeans. Having a background in mathematics, I was used to picking out variables and putting them together to come up with the correct answer to a complex problem. I did most of my post undergraduate work in chaos theory mathematics. This is a world based on nonlinear thinking. It was a world in which unseen variable jumped out of the shadows at you around every equational turn. The soybean market is very much like a nonlinear mathematical problem. You have to be aware of unseen variables and be prepared to deal with them as they jump out at you.

The reason I like the soybean market is because the variables are there and you can rely on fundamental analysis more than technical analysis when making a decision as to which side of the market to play: Long or Short!

Many traders tend to look at the state of the American soybean crop. However, there are three other world soybean producers: Brazil, Chile and Argentina. My clients made a great deal of money during the U.S. drought of 2000. We played the market to go down using November $5.00 puts. At the time the United States Government was predicting a drought of near Biblical proportions. Having studied weather for a number of years, I realized that no one could successfully predict a summer long (120 days) drought. Chaos Theory was born from an attempt in weather prediction. Soybeans are like weeds. They don't need a great deal of water to survive. They are also genetically modified at the, seed stage, to be drought resistant. At the time (2000), there was an abundance of soybeans in storage and farmers were planting a record crop, the second largest in recorded history. The only trouble might come from the three South American producers of soybeans, Brazil, Chile and Argentina. They could produce their soybeans at a cheaper cost due to cheaper labor. However, I monitored their weather and as it turned out, it wasn't as good as predicted. In short, We had a series of winning trades.

What does this have to do with this year's soybean market? Well, rains have slowed the harvest in Brazil which is the biggest outside producer of soybeans. The U.S. National Weather Service has predicted a wet spring for the U.S. corn-belt. Many farmers are considering planting soybeans instead of corn because it may be too wet this spring for corn. Remember, soybeans can grow almost anywhere. What we have here are many of the same type of variables. We can put these variable together and make an educated decision as to which way to play the soybean market.

One of the things that I find most attractive about soybeans is the fact the soy products are a fundamental source of food in many countries. Soy had a wonderful quality in that it take on the flavor of whatever it is cooked with. It is cheap to manufacture so it is used in many countries that have food shortages. In short, it is a staple food source that is heavily relied upon. This is also a commodity that can be traded year round.

There is a risk of loss in commodities, futures and options trading