Not to be overly dramatic, but the fate of the soybean market should be known soon. Five factors should decide whether futures have legs or run out of gas.
The size of the 2016 crop will be the first shoe to drop. USDA puts out its final monthly estimate Jan. 12, and our survey of growers showed just a 4 million bushel increase. At 4.365 billion bushels, production is a record, providing a supply that should linger over the market into 2018.
Chinese demand is also at a turning point. Total sales and shipments through the first four months of the marketing year are at all-time highs. Sales typically slow during the holidays, but the sharp drop to a marketing year low last week of only 3.2 million bushels threw the trade for loop psychologically. China accounted for only 48% of last week’s inspections, down from 75% before the holidays.
Falling crush margins are one reason for the slowdown. Margins at one port are down 50%, with another key area seeing declines of 80%. Chinese buyers are notorious for overbooking soybeans ahead of the Lunar New Year holidays, which begin in late January this year, earlier than normal. China is still buying beans, but these are being switched from deals previously as done with unknown destinations.
USDA could increase its forecast of U.S. exports a little in the Jan. 12 reports, lowering carryout maybe to 450 million bushels. But word of outright cancellations could add pressure to old crop contracts depending on production in Brazil and Argentina.
The size of the South American crop is still in play. The Brazilian government raised its forecast of production by 50 million bushels this morning, to 3.814 billion bushels, 66 million higher than USDA’s last estimate. Futures came under pressure with that news, but rallied back after traders looked at the latest satellite maps, which showed heavy rains reemerging in Argentina.
Big storms over the holidays delayed the final stages of planting and potentially washed out some fields in central Argentina. There’s still a week or so for replanting, but double cropped soybeans are also behind thanks to dry conditions in the southern part of the growing region. Planted acreage could be down 1% to 2% from earlier estimates.
A huge increase in 2017 U.S. acreage could weigh on prices. As the old crop export season starts to wind down, the market turns its attention on new crop. We’ll be releasing results of our latest grower survey Jan. 19, on the first day of the Farm Futures Business Summit. But some estimates are already at 89 million, 6.3% more than in 2016. The ratio of new crop soybeans to corn, which topped 2.7 to 1 over Thanksgiving, fell to 2.55 after the New Year before firming a little.
November 2017 futures fell 80 cents off their highs during that pullback. A break below $9.75 sets up a potential head-and-shoulders top that projects down to the $9.20 level, negating the bullish trend in place. The potential for such a break is one reason why I recommended covering 20% of production using an option spread instead, paying for most of a November $10 put by selling a $11 calls and $9 put. This limits upside and potential to the call that’s sold; Downside protection is also limited. And unless done with a mini-max cash contract, the position has margin risk, too.
Growing season weather could still provide potential for rallies, especially in a La Nina year. But holding old crop soybeans is too risky now. I’ve recommended being 90% priced on 2016 production. Basis remains weak, so these sales should be in futures or hedge-to-arrive contracts. Farmers are mostly sold out of soybeans, which could begin to firm basis into spring and early summer.
What about Trump? The wild card for soybeans could come from outside markets. Tax cuts and infrastructure spending could ramp up inflation expectations, convincing investors to get back into commodities. The market is seeing some of that this week during the annual rebalancing by a big index that increased its weighting for soybeans, bringing buying on the close. But any whiff of inflation could also convince the Federal Reserve to keep raising interest rates, boosting the dollar too. That typically is negative for commodities.
Trouble is, we don’t know what’s going to happen in Washington, and what that means for soybeans is even harder to predict. At times, soybeans move in lockstep with financial markets. But lately they’ve shown a negative correlation to stocks, the dollar and crude oil. Soybeans fell while those other assets were strengthening.
It’s a recipe for volatility. Curiously, implied volatility, which determines relative costs of options, is weakening seasonally. That could help growers get some protection on at a reasonable cost. That could include low cost calls to sell against if growing season rallies develop.
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Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.