USDA’s Nov. 9 reports on soybeans brought little surprise to many in the market. The agency’s forecast of 2017 production went down 6 million bushels, just 3 million less than my guess. Likewise, carryout projected for the end of the marketing year Aug. 31 was 5 million lower than October, not much of a change.
Some in the trade, however, were looking for bigger cuts after the agency’s yield reduction in October. Others believed the relatively slow pace of harvest meant USDA really didn’t get a good sample in October. Still others believe demand would lower stocks even more.
The government confounded those bullish ideas, catching enough of the trade leaning the wrong way to break futures below support dating back to the end of August. And the government’s conclusions were not without reason, however unpleasant the result.
History, for example, suggested the relatively small change in October wouldn’t amount to much difference in November, and that’s just what happened. And that same math could follow through when USDA releases its next production estimate in January.
Changes in January yields show a correlation to changes November, but it’s not very strong. Sometimes yields go up a little, sometimes they go down a little. But most of the time the difference is a half bushel or less.
A surge in Chinese buying also affects carryout projections, but an increase now would just get sales back to the level USDA already expects – not the more bullish numbers circulating in the trade. U.S. sales to China got off to a slow start this summer, then picked up when Brazilian growers balked at selling their record 2016-2017 crop. A weaker real currency is moving more of those beans, along with the urgency of another approaching harvest. Yet inventories at some ports in China are low due to the government’s inspection system, making any projections even murkier.
That means the market’s ability to rally, at least based on fundamentals, depends on South American weather. Too little rain in the center-west and northeast Brazil delayed seeding early, while too much precipitation was the problem in southern Brazil and Argentina. Now the rainfall pattern has reversed and planting looks to get back on track. The big question is whether the La Nina cooling of the equatorial Pacific, which is correlated with lower yields in Argentina, will develop as expected and impact production there.
Monday’s break is threatening a more extended pullback, but weakness now is in line with the seasonal trend, which calls for a shift back higher again into the end of November. Last year this was a bigger bounce than normal, with weather likely the deciding factor this year.
Growers should make sure they can withstand a more prolonged downturn into February if production in South America doesn’t suffer much. Volatility remains near historic lows, so put options continue to offer an alternative while waiting for the market’s decision.
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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.