Beans bounce back to new highs
Soybeans rallied to new highs again this week, right after a bout of negative technical signals in other markets. This brings back into question the potential tops of the wheat and corn markets. Are grains going higher still, or is soybeans just the last bastion of bullishness left in grains this year?
This one becomes a difficult call, but here are the pros and cons today of tops being formed in grains:
1. Downside reversals in corn and wheat in recent weeks.
2. Weakness in nearby corn futures (July corn never tested old highs when Dec corn did two weeks ago - weakness in nearby contracts is a sign of tops).
3. Good US crops in 2007 (above average corn, soybeans, winter wheat, and HRS wheat crops).
4. Early developing US crops (less chance of freeze).
5. Improving world weather (including Ukraine, China, and Australia).
6. We've solved the seemingly impossible US 2007/08 corn potential supply problem; therefore we can solve any supply problem (and SAM is just the area to solve any created soybean supply problem).
1. Soybeans are making new highs - and supply shortages are in their future (if not 2007, then 2008 or 2009).
2. Corn ethanol plants will continue to be built as corn prices remain below $4 - leaving all ethanol plants profitable and investors still interested in expanding production.
3. Biofuels will eventually create shortages - even without a 2007 weather problem.
4. The US dollar continues to plunge, leaving commodities as the best inflation hedge in the US.
5. Speculative appetites for grains hasn't waned, its just shifted from corn to soybeans/wheat.
In the next few weeks, we may discover the answer to the grains situation, as the pull/push between the bullish soybean market and bearish corn market gets resolved. Already, the soybean/corn ratio has expanded from 2.0 most of this winter to 2.5 - now favoring soybeans for profitability. Today, soybeans is actually a better sale for farmers than corn, as this soybean ratio is now making soybeans a more attractive crop to grow than corn. For 2008 crops, the ratio is near 2.25-2.30, meaning a relatively neutral situation relative to corn/beans. However, in 2009 the soybean/corn ratio is closer to 2.2, still favoring corn over soybean sales. The best sales today are 2007 soybeans and 2009 corn- with relative profitability better now here than elsewhere.
One caution to bulls: The US corn supply situation is virtually solved for 2007/08, as we not only expanded acreage by >14 million acres (and cut demand), but also US crops currently are suggesting a better than average crop for 2007 yields.
Pro Ag would plug in a 1.5-2.0 billion bu carryover for the 2007/08 crop year today, with the huge expansion in acres feeding the ethanol animal for this year. The only way we could solve this seemingly insurmountable problem (last fall) was to get US acres to expand significantly. The market has done its job here! Now, the focus will shift to SAM, where Brazil/Argentina both need to expand soybean acreage to make up for the acreage lost in the US to corn. Can SAM respond? Based on the US ability to respond to market forces, Pro Ag would not be surprised to see SAM respond as well. But for now, great prices are being offered for US crops, so make sure you've got enough sold to cover your risk!