Good, D. “Weekly Outlook: What Corn and Soybean Yield is the Market Trading?” farmdoc daily (6):149, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, August 8, 2016.
This week’s piece will be short, sweet and data driven. Soybeans have rallied more than $3 per bushel in as many months. Much of this has been based on expected declines in South American production as El Nino has wrought havoc on Argentinian and Brazilian farmers. However, the USDA numbers don’t justify recent price gains while either viewing the recent Supply and Demand report on it’s own or, within the context of tracking the USDA’s actions since the market got rolling in early March. Therefore, we’ll do the calculations and explain the current premium between the USDA’s forecasted prices and where we’re currently trading.
Historically, September is a bad month for soybeans. This is about the time the harvest numbers begin to crystallize, shortly to be followed by the actual harvest. October, on the other hand, tends to be one of the strongest months of the calendar year for beans as the battle begins between Mother Nature and the farmers in the fields. Given the benign weather patterns we’ve been experiencing and expect to continue into the near future, we believe the September sell off could’ve gotten ahead of itself. Correspondingly, October’s strength may have arrived a week early.
The USDA releases its planted acreage estimates on Tuesday, June 30th. This report typically sets the tone for the coming marketing year. David Hightower’s analysis has been posted to our site and we defer to him in terms of the fundamental supply and demand numbers. We’ll pick the individual markets apart through the actions of the commercial traders, the actual producers or end line users of these grain markets. Given the depressed levels many of the grain markets have been experiencing can this report actually do further damage?
The soybean forecasts this year should set another global production record. This comes on the heels of last year’s record harvest which has left many of the domestic bins full. Obviously, supplies have pushed this market justifiably lower since last year’s domestic harvest numbers were confirmed. This leaves soybeans in the same condition as many of physical commodity markets; facing a supply overhang in a world of declining demand. However, those of you looking for a contrarian point of view may want to look at the substantial actions being taken by the commercial traders who are rapidly approaching their record net long position from last fall.
There are two issues to look at this week in the soybean futures market. First, I’d like to discuss the seasonal pre-planting characteristics of the soybean market, how they’ve changed over the last ten years and what the current situation looks like. Secondly, I’d like to use this setup to explain the difference between market forecasting and trading program design with a special focus on soybeans and the market’s natural fear based reactions.
This is a critical point in the soybean futures’ seasonality due to the approach of the Brazilian harvest and the spring planting intentions here in the U.S. Brazilian soybean production has been expanding at unprecedented levels, setting new production records in ten out of the last twelve years. A final harvest number near projections would also keep that streak rolling. The Brazilian harvest has just begun but recent rains have already dampened the early harvest projections above 95 million metric tons(mmt) and are currently suggesting a number closer to 91mmt.
This week’s theme was the same as last week, expecting that some of these markets had gone too far, too fast and were ripe for a turnaround. Like last week, our strategies have continued to be on the wrong side of the markets.
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Commercial soybean growers who hadn’t hedged their crop early in the year have taken a pounding on prices all summer long. As is seasonally predictable, the market did get somewhat of a harvest rally moving from a low of $9.04 in the November soybean futures contract up to current levels around $10.25. Negative price action has accompanied this rally as growers have sought to unload whatever they could ahead of the USDA’s November World Agriculture Supply and Demand report. The primary takeaway in the soybean market is the nearly 8% increase in this year’s crop estimate, now at 3.958 billion bushels versus their previous estimate of 3.927 b/bu. The only kind note in the report was the trade’s general expectation of 3.967 b/bu.
More interesting than the fundamental action is the increasingly negative technical picture taking shape as you can see on the chart below.