Counter-seasonal rallies over winter sometimes are a good thing in the soybean market, putting futures on a bullish trajectory to keep rising into spring and early summer.
But rallies that aren’t built on a firm foundation can cause trouble too. That’s one of the risks in the soybean market that may play out into March as the focus shifts from old crop to new.
So far, old crop futures are holding to a bullish trajectory of higher highs and higher lows. If the pattern holds it portends more gains into the start of the growing season.
But nearby charts are threatening to derail that scenario. A break by March below $10 into delivery, unless rejected quickly, could set the market on a bearish path, especially if all the attention is on new crop.
USDA perhaps damned the bean market with faint praise last week at its Outlook Forum. The agency said leftover stocks at the end of the 2017 marketing year would be unchanged from 2016, at 420 million bushels. But the government’s forecast for 88 million acres was 3.5 million higher than its November guess. And, while below our January survey of 90.5 million, it was a reminder that more and more beans are getting ready to hit the market in the year ahead.
The trade’s other concern is rising estimates of South American production. Though both Brazil and Argentina have had some problems, local forecasts suggests their combined output could be 250 million bushels above USDA’s last estimate Feb. 9. While global demand appears to be growing, much of that growth will come from China, where total imports can fluctuate if the economy stalls. Even as beans begin flowing from Brazil, stocks at Chinese ports are already mounting, sending crush margins into the red.
Two potential bullish factors are working into the market, one for the shorter-term, one more long-term. The shift to a neutral reading on the El Nino cycle during the growing season creates a 50-50 chance of rallies to the $10.95 level or better. There’s also a correlation between these neutral cycles after La Nina years that favor below average yields next year in both Brazil and Argentina.
Production in South America could be hit twice if current patterns in financial markets continue. The currencies of both countries are strengthening. That lowers the price growers receive there when converted to dollars, and can be a disincentive for expansion.
If these trends hold, growers might need patience, perhaps withstanding lower prices into the end of the growing season in the U.S. or longer. High crop insurance base prices than a year ago will help provide at least some downside protection. Growers who sold new crop aggressively on the rally over the winter should also consider some type of call option strategy to provide more upside coverage against lower yields and a rally. Volatilities remain seasonally low.
I did recommend protecting 20% of new crop with a November $10 put, financed by selling a $9 put and $11 call. Being too aggressive sales early typically hasn’t paid off in soybeans unless the market is headed for a significant prolonged downturn. The U.S. has never seen five years in a row of above average yields, though there’s always a first time.
More from Farm Futures:
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.