TFM Perspective 10-15-21


Soybeans: Supply and Perception


From mid-April through late August, November soybean futures traded near the $13.50 – a significant rally from the spring of 2020. At that time, prices bottomed at $8.26, as projected carryout of over 1 billion bushels dwindled to just over 100 million. Reduced crop sizes and a massive uptick in world demand sent prices dramatically higher, peaking in June of this year at $14.80 for new crop futures. Currently, we see the market declining, with futures trading under $12 for the first time since late March. What’s behind the price drop, and are lower prices in store for the year ahead?


The fundamental picture since mid-August has indicated more supply potential. Consequently, this has had a negative impact on prices. Projected carryout (leftover supply at the end of the marketing year) is now near 325 million, more than double what was projected mid-summer. Expectations for higher yield (now near 51 bushels an acre) and a slowdown in demand has changed the picture from critically tight carryout to snug. When prices peaked in June, it looked as though the market may continue to move higher to ration inventory. Timely rains throughout a very parched Midwest kept the crop alive and in moderate shape. Even better rainfall totals in August helped solidify a growing expectation that this year’s crop averted a disaster. Consequently, due to a significantly higher price than a year ago, end users moved to a more conservative purchasing approach by August, buying only as needed. A slowdown in the crush pace and exports indicated that high prices were curing high prices.


At the same time crop confidence for the Northern Hemisphere was growing, high prices created expectations for record-large production in South America is now expected for the upcoming season. Both Argentina and Brazil will increase acres and produce record-size crops, assuming normal weather. Therefore, while near-term supplies remain snug, the big picture perspective is looking more negative for prices. Add to that (what we might term) a Black Swan event due to supply logistics in the fertilizer industry, and it is likely that increased acres of soybeans by U.S. farmers will also occur. Both the Southern and Northern Hemisphere projected supply leaves a perception that more supply is on the way. Consequently, end user buying will continue to be on an as-needed basis. This doesn’t mean demand is slowing. Rather, it means it comes in a different form. Large pre-buying is not occurring now and likely will not in the future, unless crop concerns develop.


The takeaway for producers is that this past year proved very volatile for prices with an uptrend that lasted more than a year. Assuming normal production, high prices will likely cure high prices. That means new crop soybeans trading near $12 could very likely be much lower by fall of 2022. Volatility could be high, so a balanced approach to marketing may be the best way to prepare for bull or bear markets. Selling ahead to ward off downside price potential and re-ownership with call options can keep you in the market, should the supply picture change (which can always happen due to weather). Also, consider purchasing puts (providing a price floor) on bushes you do not want to commit for delivery.


As with any strategy, be sure to understand the risks and rewards involved before entering into any position. Visit with a professional and trusted advisor. Be proactive to prepare yourself for any scenario.


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.


Bryan Doherty

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