Soybean plant

Soybean Review - Soybeans try to play against form

Can the “Trumpflation trade keep the rally alive?

February can be a perilous time for the soybean market. Brazil supplies hit the international market full force just as farmers need to sell inventory to pay loans and bills. That’s a big reason seasonal trend charts show prices selling off sharply to winter lows on average this month.

Years with surprising demand and tightening supplies can buck that trend, keeping the rally off post-harvest lows alive until spring. Supplies aren’t tight thanks to the record 2016 crop. Demand is better than initial estimates, but that’s par for the course and hardly a surprise. Year-to-date sales and shipments are running at record levels, and USDA could again be forced to back-pedal on its belief South American sales will lead to quick and extended drop in business.

Indeed, old crop futures have avoided much of a break in early February. But now the real test may come as nearby futures start to flirt with support levels. A break below $10.50 on the March could trigger liquidation. Big specs were already lightening up on bullish bets early last week on just these fears.

Earlier it appeared bearish new crop fundamentals could be the anchor that sinks the soybean ship. Our December-January survey, conducted after the soybean-to-corn ratio hit 2.7 to 1, showed growers ready to plant more soybeans than corn for the first time since 1983. Those 90.5 million acres would make it more difficult to talk about tight supplies, even if yields fall back to normal, a drop of almost 5 bpa from the record posted in 2016.

The soybean-corn ratio retreated to long-term support, which could come back into play soon if November can’t move on December corn. Whittle the away the acres and rally potential for new crop improves noticeably. 

Yet even if old crop is able to move higher, the sky doesn’t appear to be the limit. The nearby chart has a lot of resistance that could limit rallies once the market gets above $11.

In any event, growers should be sold out of old crop and focused on 2017. Cash old crop soybeans are at profitable levels, $1 or more above cost of production lowered by all those bushels. Beans are moving into strong hands and there’s still carry in the market, so using futures/hedge to arrive contracts could also work.

This week’s fundamental model shows a new crop selling range up to $10.75, but getting there likely will mean waiting for growing season weather or a bullish March 31 planting intentions report. In any event, I think it’s still to early to be selling new crop soybeans seriously. With the cost of production near $10, including family living, and a lower guarnatee from ARC benchmark revenues, selling now means a loss unless yields are above average. 

Other than weather, the wild card in this may be the flow of outside money. The rally to record highs in the stock market shows what can happen to caution when investors believe tax cuts and increased growth are a done deal. If the mood swings back to beans, happy days could be here again. 

I did recommend protecting 20% of new crop with a November $10 put, financed by selling a $9 put and $11 call. Growers being more aggressive should either be short-term hedgers or ready to cover sales with call options if the market turns around.

More from Farm Futures:

Weekly Fertilizer Review
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 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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