The soybean market so far this year has resembled a game of 7-card stud, where a promising start seems to be finishing in a bust as each new card turns up. Beans may still have an ace in the hole before it’s time to fold, but only a wild card may keep a bad hand alive.
Futures failure to hold early gains following a bullish June 12 USDA is just the latest setback for a market back on its heels. July broke through last June’s lows today, leaving November to trade $1 below its May highs.
The 800-pound gorilla in the room is the one who isn’t there: China. Until the world’s largest importer of soybeans begins committing to purchasing U.S. supplies at a serious pace, the market has nothing else to trade but weather. Thanks to very strong early crop ratings, growing season conditions aren’t any help yet.
With futures oversold the market may finally be headed for a washout, maybe as early as the end of the week. The U.S. is in theory supposed to announce its final tariffs against China on June 15, which would presumably in turn trigger sanctions against imports from the U.S., likely including China’s main pressure point, soybeans. But after hammering out a deal on the troubled ZTE company and working on the North Korean summit, Presidents Trump and Xi could be best buds again and delay any trade war. The only rule these days is that there are no rules, so anything could happen, or not.
It's easy to consider a world where China doesn’t buy U.S. soybeans. The U.S. would still sell soybeans to other countries around the world, but exports likely wouldn’t improve much from this year’s level. If current strong crop ratings translate into near-record yields, inventories would likely swell to record levels over the next year, even if exports improve.
Less clear is what the impact of the U.S. and China playing nice would be. USDA, for example, maintained its forecast for 6.1% growth in total Chinese soybean imports during the 2018-19 marketing year, boosting U.S. sales and tightening carryout a little more. But the pace of increases in imports appears to be slowing.
Growers in Brazil aren’t likely to give up their leading role, either. Their currency, the real, has strengthened a little against the dollar and farmers pricing the crop they’ll plant this fall in dollars won’t get as much as they would have last week before prices broke again so sharply. But their values converted from dollars back to reais are still very attractive.
The break by November below $10 has negated the bullish seasonal trend soybeans were following for 2018. That doesn’t rule out rallies, but the market boils down to weather. The first potential window for gains should open quickly: hot weekend weather and a potential shift to drier weather into the final week of June. That time is mostly about corn, but soybeans could follow along too. After that, beans have another chance in August; longer-term forecasts show the dry pattern around I-70 continuing from Kansas City into western Illinois, but overall no damaging heat or widespread drought
After that, dry conditions for planting the South American crop are the next flashpoint. Yields in Brazil don’t appear connected to the El Nino warming of the equatorial Pacific that could emerge in the fall, but weather is always unpredictable.
I’ve recommended 50% price protection on new crop. With futures unlikely to get back to profitable levels soon, consider short-dated September new crop puts on June rebounds to try to catch another break lower. Otherwise, buying call option spreads to cover some existing sales could also be prudent.
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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.