TFM Perspective 08-27-2021

TOP FARMER WEEKLY PERSPECTIVE 08/27/2021 BY BRYAN DOHERTY

The Bull Case for Soybeans

On Tuesday of this week, soybeans rallied sharply, gaining nearly 40 cents on most futures contracts. A drop in crop ratings, along with scattered precipitation at a time when plants are filling their pods, was enough to turn the tide from weaker price action the last couple of weeks. November soybean futures, reflective of supplies in the field that will soon be available to end users both domestically and worldwide, are trading in a range of near $12.50 to $14.50 since peaking in early June, with current prices trading near $13.35. Ravenous demand pushed futures to their highest level in seven years. As harvest approaches, all eyes are focused on yield potential, as the current supply and demand table suggests there is little room for error with this year’s crop production.

Despite high prices and drawdown in inventory (especially in the U.S.), bullish traders will argue that end users will be aggressive to secure inventories near the harvest season. It is typical for prices to decline into fall, as supplies become more plentiful. Currently, after having secured copious inventory prior to the key summer growing season (price peaking in early June), it appears both domestic soybean processors and importers have since moved to a just-in-time inventory procurement method. That is, with high prices, they buy only as needed. That could change in a hurry if any hint that this year’s yield could be below the last USDA estimate of 50 bushels an acre. Farmers, on the other hand, have had good prices to secure since early summer and likely have sold about as far as they intend to. The rest of unsold crop likely goes in the bin to be sold later.

Other dynamic factors providing support for prices are record-high world vegetable prices which, in turn, have driven soybean oil prices to multi-year highs. Dry weather has reduced the Canadian canola crop to its tightest supplies in over a decade. A recovery in the hog herd in China (after hog producers there battled African swine fever) suggests a continuous need for supplies. Projected ending stocks for the 2021/2022 soybean season (about to begin on September 1) are very snug at 155 million bushels. Assuming no changes to demand, if U.S. yield were to drop one bushel per acre, carryout could be near 75 million bushels, an all-time low. Rationing could occur. Rationing occurs through higher prices. A La Nina weather pattern may suggest a dry season for both parts of Brazil and Argentina. Brazil is a huge supplier to China and Argentina, the world’s largest exporter of soybean meal. Lastly, tight supplies of corn suggest there could be a fight for acres for the 2022 growing season.

Outlook can change in a hurry, and usually does. The market will factor in new information in the weeks and months ahead. From a producer pricing perspective, don’t get caught in the trap of thinking that prices “have to” go higher. Take advantage of strong price action this year. If wanting to stay in the market, consider re-owning with fixed-risk options that can give you plenty of time to participate in a price rally, should one occur. If not wanting to sell now, consider put options to establish a price floor. Should prices drop or unforeseen negative news events occur, you might sleep better knowing you have downside price risk managed.

As with any strategy, make sure you understand the risks and rewards of positions before entering into them.  Find a trusted advisor that can help you navigate the volatility, and find what works best for your operation.

If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-334-9779, extension 300.

 

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.

Author

Bryan Doherty

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