Soybean Market Riding on Weather Issues in South America
Though it’s only mid-January, South America has less than ideal conditions, in particular some regions of Argentina. South America is a very long geographical region (typically referring to Brazil and Argentina for agricultural production discussions), and it has an extended growing season compared with the U.S. In other words, not all the crop is grown within a window of a few weeks like in the central U.S., where most of the crop is planted in one month and harvested in one month. Nonetheless, recent weather has raised eyebrows. Excessive moisture in north-central Argentina, a key growing region for soybeans, has caught the attention of the market.
By some accounts, nearly 60% of Argentina’s key growing regions have received more than 10 inches of rain over the last 30 days. This implies that areas that have had significant flooding as of late may not have crop at all. Other areas that seem to have more saturated soils may find that yields could suffer. We believe the market is beginning to become more concerned that very saturated or flooded areas may not have time to replant. While looking at pictures on the internet or watching the news, heavy flooding always appears devastating and, in our experiences, generally does lead to some crop loss in areas. The residual benefits of moisture elsewhere can often make up the difference. Yet, it could be different in parts of Argentina where heavy weekend rains may suggest that crop loss is at hand – and it could be rather significant. Private estimates are suggesting losses from 2 to 4 million metric tons. There are, for rounding purposes, 40 million bushels in a metric ton, and consequently, losses are ranging from under 100 million to well over 120 million bushels. World carryout could decline by 5%.
Does the market have room to absorb these losses with expectations of world supplies reaching a pinnacle in 2017? Probably, though not much room. Demand has been outstanding and continues to gobble up any excess inventories. Carryout could swing significantly both domestically and worldwide in the months ahead, depending on how the South American weather scenario plays out as well as U.S. farmer planting intentions.
Memories are short, and memories last year of significant flooding in Argentina and reduction of the soybean crop helped to shift the market from first gear to fourth very quickly, as prices rallied $3.00. We’re not arguing for a $3.00 rally, yet the price movement at the end of the week of January 8 and start of the week of January 15 indicates that there are plenty who want to own soybeans.
The key is balance. Both bulls and bears will argue the merits of their biases. If you are holding old-crop soybeans, consider selling rallies to reduce risk and generate cash flow. Reinvest a portion into fixed risk reownership strategies such as calls or bull call spreads. For new crop, consider getting started on this rally with forward contracts, hedge-to-arrive contracts, or short futures. Cover these positions with November soybean calls.
If you have questions or comments, or would like help in creating a balanced strategy for your operation, contact Bryan at Top Farmer Intelligence (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.