TOP FARMER WEEKLY PERSPECTIVE 9/3/2021 BY BRYAN DOHERTY
The Bearish Argument for Soybeans
Last week we noted several reasons why soybean prices could have a bright future, as expectations for tight supplies and strong demand have set the stage for solid price support and rally potential. If fall yield results are short of expectations or weather developments in South America challenge the growing season, supply rationing is likely, which is accomplished through higher prices. Measurements of supply are often talked about using the terms carryout and stocks-to-usage. Carryout and stocks are terms that are used interchangeably. Both represent the supply of soybeans that are expected to be left over at the end of the marketing year, August 31. For the crop that is currently being produced, the USDA is estimating carryout by the end of next August at 155 million bushels, a very small number historically. Others will argue that stocks alone may not be a good enough measure. Taking stocks and dividing by usage, you get the stocks-to-usage figure. The current figure is 3.5%, the lowest in eight years and second lowest over the past twenty-five years.
Soybean prices have had a remarkable price recovery this past year, as projected carryout from two years ago (close to 1 billion bushels) has continued to trend lower. Futures have rallied from below $9 to over $15 in the last 18 months. Current supply numbers are tight enough that, despite expectations for a big crop in the U.S., prices may have little downside. The problem with using tight supply as a reason for prices to move higher is that, at some point, end users will refuse to buy at a higher price. That seems to have been the case over the last several weeks where soybean prices have failed to rally, despite significant weather uncertainty in the western Corn Belt. Crushing plants have slowed their usage and exports have basically crawled to a halt. End users are betting on new crop availability. By many accounts, new crop soybeans trading near $13.00 are a disappointment, compared to the over $15 prices traded just a few months ago. In other words, high prices are curbing demand. Whether the curb is either temporary or long-term remains to be seen. History tells us that most any market has favorable fundamentals at high prices. Therefore, the argument of tight supply and strong demand may be considered old. The bears will argue that the market is looking ahead. If yield is above the USDA estimate, it is likely that end users will stay with a very stingy buying methodology. That is, only buy as needed. All arrows in both Brazil and Argentina point to increasing acres of soybeans this fall and winter.
Markets often move on perception. Just the perception of higher supplies from South America, less demand, or both could leave bullish traders frustrated that the market isn’t responding the way they feel it should. Perceptions of crop size in the U.S. may be changing. Rain over the last 10 days has reached most (if not all) of the bean crop that needed moisture. The swing in yield could be significant. Instead of losing two bushels an acre due to dry weather, farmers could gain two bushels an acre. The yield swing could be as much as four bushels. An increase would add to carryout. When the trend of carryout is increasing, we typically see prices move in a downtrend. Managed money has been net long the soybean market for over a year. If managers anticipate increasing supply, they may very quickly move from long positions to short positions.
This and last week’s Perspectives have highlighted a market that has incredibly tight supplies and historically strong demand. Prices are not likely to stay at their current level. The marketplace can be violent and can move quickly. Higher prices this summer and fall will likely increase production throughout the world. Is it enough? Only time will tell. Soybean producers should concentrate their efforts on strategy. Be balanced in your approach to marketing, preparing for the market to move swiftly in either direction. Make sure you’re making enough cash sales to shift risk. On those bushels you want to store, purchase puts. Retain ownership of beans using call options or option spreads. Look ahead to 2022 prices for opportunities to make sales. Consider the risks and rewards of your strategy before entering into any position.
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.