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Is the Soybean Market in Trouble?
November 2018 soybeans have had a wild ride in 2018! Prior to activity this week, soybean prices bottomed in January and posted a bullish key reversal on January 12, the release day of the Supply and Demand report and the last production estimate for 2017. Then we saw prices rally from 9.67-1/2 to 10.60 on April 2.
The catalyst behind this recovery was due, in large part, to a drawdown in Argentina's crop size from dry weather. A strong upturn in soymeal prices ensued as Argentina, the world’s largest soymeal exporter, was running short on exportable soymeal. Soybean prices remained choppy during April and May, retesting the 10.60 area on a number of occasions, and finally reaching its peak at 10.60-1/2 on May 29.
Fast forward to this week. The latest crop estimate for Argentina (released Tuesday) is now 37 million metric tons, a significant drop from last year's 57 million metric ton crop. The counter to Argentina’s crop loss, however, is a growing Brazilian crop, now at a record 119 million metric tons. That’s nearly 7 million metric tons larger than estimates at the beginning of the growing season.
As of this writing, futures have dropped to new contract lows to under $9.60, a drop of over 1.00 since May 29. The speed at which soybean prices can drop is a concern. Once prices tip over, they have a tendency to move much faster and farther than most anticipate. The fallout the last two weeks comes on excellent planting conditions and a good start to the growing season as well as high crop ratings. In addition, the export market has not lived up to expectations and this, too, has weighed on futures. World supplies are still large, yet as of late, the market is likely looking at something different that is driving prices lower.
Projected carryout for the 2017/18 season is 505 million bushels, a significant amount, yet down from the May estimate of 530 million. U.S. carryout for next year is forecast at 385 million bushels, lower than the May estimate of 415 million. Prices took this supportive news and still went lower. Our guess is that the market is viewing two consequential items that affect potential crop size. One is the projected yield of 48.5 bushels, estimating the production at 4.280 billion bushels. Given the good early start to the planting season, there’s a high likelihood the June acreage estimate may increase by as much as two million. The second item is that total acreage may also be greater than anticipated. With higher yield and greater acreage, the crop may grow from 4.280 billion to somewhere closer 4.5 billion. This could push carryout to near 600 million bushels.
One last note: Markets like some types of uncertainty (such as weather) to push prices higher. However, markets don't seem to like political uncertainty. Soybeans and proteins likely have the most to lose in a trade war, and with uncertainty continuing to loom large as mid-June approaches, beans have taken a defensive posture. Is this correct? Only time will tell. Futures prices are often considered a place where people “vote” on price. The market has voted negative.
As a producer, if you sold this winter at good value, consider buying call options to cover these sales. World and U.S. carryout numbers are more than sufficient, and that can change in a matter of weeks. While the market looks in trouble now, the more dominant and most critical factor determining price will occur in July and August. As weather unfolds, so too will price direction. Will you be ready?
If you have questions or comments, contact Top Farmer at 1-800-TOP-FARM Ext 129.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.