Soyabean prices set to reverse

Lack of export demand and huge carry-over stocks squeeze prices

Soyabean prices have taken everyone by surprise with a sharp 16 per cent rally in just two months. The soyabean futures contract traded on the National Commodity and Derivatives Exchange (NCDEX) has risen from ₹3,437 a quintal in March to record a high of ₹4,412 in May — a whopping 28 per cent rise in just six weeks. The price has since come off from the high and is currently trading at ₹3,967.

In March, we had predicted in this column that NCDEX-Soyabean futures would fall to ₹2,900-2,800, but that didn’t turn out to be so. We take a look at what has changed since then.

The rally in soyabean prices was due to the expectation of a lower output on forecast of a below-normal monsoon, says BV Mehta, Executive Director, Solvent Extractors’ Association (SEA). In April, the India Meteorological Department (IMD) had predicted monsoon rainfall to be 93 per cent of the Long Period Average — which is below normal. The fear of a drop in output thus saw speculators buying in large quantity, sending prices up. Prerana Desai, Vice President, Research, Edelweiss Agri Value Chain, says, “Crushing was not happening and it led to a short-term supply crunch. So, prices rose despite the overall fundamentals remaining weak for the commodity.” However, some market players also say that every year between March and May soyabean prices tend to go up on lower arrivals.

Weak fundamentals

The broader fundamental scenario for soyabean, however, remains weak, suggesting that the recent rally could just be an aberration. Soyameal exports are under pressure. In the last financial year (FY14-15), exports tanked over 76 per cent to 6.59 lakh tonnes from the previous year. The latest data from SEA shows that meal exports were down 22 per cent (month-on-month) in May. Higher domestic price has shifted the focus of global meal exporters towards cheaper avenues like the South American countries, according to Karvy Comtrade.

Further, there is ample supply too in the market now. “The soil moisture is good due to the recent rainfall. If the monsoon onset is on time, then it will result in good acreage, which is expected to go up by about 5 to 7 per cent in this new season,” says Prerana Desai. “There is a huge carry-forward stock of about 1 to 1.5 million tonnes from the previous seasons and so even if the monsoon fails leading to a production shortfall, the current inventory will be more than enough to take care of the entire demand,” adds Mehta. That said, the upside in soyabean price is likely to be limited and there is a strong probability of a correction in the coming days.

Technical outlook

Short-term view: The uptrend that had begun in the last week of March has halted at a high of ₹4,412 recorded on May 8. The sharp 10 per cent fall from this high suggests that the uptrend has reversed.

Additionally, there is a head and shoulder reversal pattern visible on the daily chart which confirms the trend reversal. The neckline resistance of this pattern is at ₹4,000. Also, the 21-day moving average is at ₹4,060, which is a key short-term resistance for the contract. The inability to breach these hurdles and a reversal from the high of ₹4,160 last week suggest that the contract faces selling pressure at higher levels. Having said this, a fall to ₹3,700 — the 100-week moving average support level — looks likely in the coming weeks.

Whether the contract breaks below this support level or not will then decide the next leg of the move.

The short-term outlook will turn bullish only if the contract records a strong break and a close above ₹4,100. In such a scenario, a rise to revisit ₹4,400 levels is possible.

Medium-term outlook: The rally in the last two months has eased the downside pressure for the contract in the medium term. The contract has a key trendline support at ₹3,550 which is also the target level of the head and shoulder reversal pattern mentioned above. Although the possibility to test this level cannot be ruled out, an immediate break below it looks less likely. However, a reversal from ₹3,550 is possible which can take the contract higher to ₹4,000 and even higher levels thereafter.

The downward pressure will gain momentum only if the contract decisively breaks below ₹3,550. Such a break can drag the contract lower to ₹3,000 thereafter.

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