Field of green soybeans. yelena yemchuk/ThinkstockPhotos

Soybean Outlook - Three keys to higher soybean prices

Production, exports and money flow crucial to rallies now.

Growers hoping to make money on 2017 crop soybeans they’re starting to harvest can pin their hopes on three factors that should drive prices in both the short and long run. Any or all could move the market higher or lower into 2018.

The first domino to fall, maybe, is the size of the crop. USDA raised its forecast of yields by a half bushel per acre Sept. 12 to 49.9 bpa, an increase that added 50 million bushels to total production. That took the government’s projection to a record 4.431 billion bushels.

Other tools we use to judge yields do and don’t agree with that outlook. A weather model incorporating July and August weather in key states is right on with USDA at 49.9 bpa. That may or may not be a coincidence, since the model is derived from one developed by USDA.

The weather model is a little more reliable at predicting USDA’s final yield in January, but not by much. The most accurate method of the past decade in September is the Vegetation Health Index, which came in a 49.1 bpa.  Crop ratings are less impressive, though the state-by-state model we use is close to the accuracy of USDA’s September estimate. That model showed a decline in the latest week down to 47 bpa. 

But even if yields aren’t as big as USDA forecasts, growers could still harvest plenty of beans. The agency’s next production estimate Oct. 12 should also feature an adjustment in acreage. I’ve plugged 900,000 more acres into my forecast, based on Farm Service Agency certifications showing farmers planted 1.5 million more acres of soybeans than corn. That’s just the opposite of what USDA’s National Agricultural Statistics Service reported June 30, based on a survey done during the first week of June, when some first crop soybeans and most double crop soybeans were still in the bag.

So, size alone may not be enough to produce rallies. But it could drive another factor: money flow. Funds are still bearish on soybeans, but they’ve been covering shorts in both soybeans and meal. And they’ve aggressively bought soybean oil, helping fuel the global rally in vegetable oils.

The impact of fund money can also be seen in correlations with other assets favored by fund managers. Soybeans have a positive correlation with the stock market and crude oil – that is, when stocks go up, soybeans also tend to go up. Soybeans have a negative correlation currently with the dollar. These numbers support the idea that big speculators will shed safe havens like the dollar to take on more risk, helping drive stocks to record highs while taking crude closer to $50 a barrel. 

The final key to watch is export demand. USDA projects Chinese soybean imports will grow just 3.3% this year, one of the lowest spurts in more than a decade. USDA has consistently underestimated Chinese buying in recent years, and adjusted its forecast for 2016 and 2017 crop soybeans higher in its Sept. 12. Unless economic growth in China stalls, the country’s appetite for soybeans should increase.

The U.S. share of that prize will depend on how many soybeans South America can supply. That’s a function of both economics and weather in Brazil. The strong real acts as a disincentive for growers there to expand rapidly. While they may boost acreage 2%, exporters may have to rely on whittling down inventories to meet export demand. That could lower world stocks modestly, and set up potential for rallies on any weather threat to the crop.

Brazilian farmers can begin plantings soybeans Sept. 15, but dry conditions could delay that for at least another week, maybe longer. The setback could open a window for additional U.S. sales in December and January, when those early beans would normally be hitting the market. 

Weather in Argentina could also be a factor. Yields tend to suffer there during La Nina years, and forecasts now show potential for this cooling of the equatorial Pacific through winter. Flooding rains have already washed out some of the wheat crop there.

Soybeans have a three in four chance historically of selling off into late September and early October. If futures can avoid new lows it could set up a more bullish pattern and perhaps accelerate fund short covering.

For the complete version of this outlook, including supply and demand tables and graphics, along with price charts, click the “Download” button below.

More from Farm Futures:

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Weekly Energy Review
Weekly Basis Review

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.

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