We live in an age of endless information. This presents a huge and still growing problem for fundamental traders who base their market decisions upon the calculated variables involved in the markets they trade. When I started trading nearly 30 years ago, good information was still the key. It was hard to find and sources were treasured trade secrets. Today, there is so much news and so many data points that it is virtually impossible to really have a grasp and proper weighting of the issues affecting any given market. This becomes increasingly difficult with each additional market traded in this manner. This week, we’ll track the 2016 soybean crop from pre-planting jitters, through the summer rally and subsequent decline before ending with our idea of harvest prices.
Department of Agricultural and Consumer Economics
University of Illinois
A common question here would be, “What do gold and soybeans have to do with each other?” The short answer is that they are both the most speculatively overbought commodities we trade. The deeper answer is that both of these products come from the ground and the producers of these commodities have used this rally to lock in bonus money as there is no way they collectively subscribe to the inflation thesis suggesting structurally higher commodity prices in a near zero percent interest rate environment. Our experience has shown that the huge imbalance in positions between the commercial producers selling forward production and the speculators’ buying of anticipation typically resolves itself in the fundamental direction of the commercial traders’ collective prediction. The gold and soybeans rallies are about to find themselves lout of gas.
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.