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.
Soybean farmers are now the most short they’ve been since October of 2012. This means that U.S. farmers who are able to take advantage of South American misfortune stand to have their best year in quite awhile. There’s no question that South American production is not going to pass muster. However, in an interesting twist of fate, the same weather that kept us out of the fields this spring is going to be a boon to late planted soybeans heading into a La Nina fall growing season. Therefore, we view this last leg up in the soybean market as a selling opportunity rather than the emergence of a new trend.
The soybean rally has been driven by two primary factors – South American production concerns and Chinese demand. Today’s piece will be heavy on the data and light on the dialogue. However, I do want to tie into last week’s article on new Chinese commodity traders and the effects of Chinese governmental policies on free markets as well as the impact of our own crop insurance programs. The sum total of the analysis justifies the tremendous amount of producer selling we’ve seen and makes a strong case for selling soybean production ahead of the coming US seasonal peak.
The farming industry in the United States has been under considerable pressure as the gains of years’ past were quickly washed away by modern technology and agronomy practices. The record prices achieved in soybeans just last year now seem like a lifetime ago to farmers who bought land and equipment based on the increasing average prices of corn, soybeans and wheat over the last decade. Today, we’ll take a long-term look at the soybean market and see what has farmers so anxious to sell.
Due to the general increase in volatility over the last few weeks across most of the financial markets, we’re going to shift our focus towards the grain markets as the financials sort themselves out. The grain markets had a weak year in 2015 as global deflation combined with good weather simply made everything cheaper. However, as a direct result of these cheaper prices, we’re now seeing reports of land expected to be left fallow this year as farmers and would be agricultural entrepreneurs shift their focus towards more fertile ground.