$10 soybeans! A feat not seen since June 2018!
A combination of strong export demand and yields that are inching lower due to the exceptional August heat continues to keep prices supported. Back in August I wrote how $9.75 would be strong resistance on charts for soybean futures, as that was the Jan. 2020 price high area, and significant resistance on charts. Price movement back up to that higher price point seemed possible due to the August heat, a likely reduction of soybean yield.
But what could take prices through that major resistance level on charts? It would have to be unexpected friendly news in the form of increased demand combined with further decline in yield.
That unexpected friendly news was delivered in the most recent USDA report. Export demand for old crop beans was increased from 1.650 billion bushels to 1.680 billion bushels. That increase in demand reduced old crop ending stocks from 615 million bushels to 575 million bushels. The lower old crop ending stocks were then applied as lower carry-in for the 2020-21 crop year.
And here is where the unexpected bullish surprise came into the market place: the lower carry-in, applied to a smaller new crop yield number of 51.9 created a new crop ending stocks number of 460 million bushels, down from 610 million bushels! A definite surprise to the market place which was not anticipating that much of a reduction to new crop ending stocks.
This news was enough to push soybean futures through $9.75 technical resistance on charts, up to the next resistance point of $10, and now even higher.
Now that prices are through that $10 resistance price point, how high can this market rally? Let’s take a closer look at the fundamentals facing this soybean market.
- Export demand is fierce - According to recent USDA export data, soybean export sales commitments for the 2020-21 crop year are already over the 1 billion bushel mark, and well head of average pace. Chinese buying has been voracious. Their demand for grain is strong as China’s hog herd is rebuilding. In addition, grain production issues due to torrential rain this summer in China has left the country in need of grain. This is good news for the United States and for the Phase I trade deal. Yet, China is China, and there are already rumors of them sniffing around South American grain markets to meet additional demand needs.
- No carry in market - Looking at the price of soybean futures from November 2020 contract through the August 2021 contract, contract prices are all trading within a dime of each other. Essentially, there is no carry in the futures market. Usually there is an increase in price from month to month, and currently there is not. This phenomenon occurs in demand-led markets. The soybean futures prices are fundamentally saying that the market wants farmer soybeans from now until August. The demand is there!
- Yield scenarios - The August heat zapped the possibility of record soybean yields. That has already been traded into the futures prices. In the coming weeks we will have a better understanding of where soybean yields actually are as combines get rolling. Right now, it seems the market is trading a U.S. yield of between 51 and 51.9 bushels per acre. Looking at the chart below, the ending stocks and stocks to use ratios get exceedingly tight with every slight drop in yield potential. That extreme heat in August may have taken a larger toll than expected to soybean yields during the critical pod filling stage. And don’t forget about the freeze that North Dakota had in early September. Many producers feel that extreme cold blast nipped at top-end yield potential. If it is perceived that yield becomes less than 51 bpa, and that demand stays strong, the market may have more rallying potential ahead. After all, it’s been nearly a decade since we’ve witnessed the price phenomena of “beans in the teens.”
- La Nina - Weather gurus continue to talk about the odds of La Nina occurring (see full story here). If this should happen, the effects will primarily impact South American production. During December through March, La Nina historically tends to bring dry weather conditions to South America. In a situation where the demand for soybeans is going full bore, and the United States crop is on the verge of getting smaller, any decrease in production in South America will only continue to lead to supportive prices for soybeans.
- Funds - Fund traders are already long nearly 200,000 contracts of soybeans. This is the primary note of caution for any additional price rally. 200,000 contracts long is usually about as far as they go for length, with the exception of 2012 during the drought, when they were long closer to 250,000 contracts. If there is any sign that demand is easing, or U.S. soybean yields end up being larger than expected, profit taking by the funds will begin a significant price sell off.
Next price targets?
Assuming November soybeans stay above $10, the next upside target is the $10.50 area. This will be both a price target from a technical resistance stand point and psychological stand point. The $10.50 mark will likely hold as major resistance for now, unless it is realized that U.S. soybean yield is less than 51 bushels per acre.
And if U.S. soybean yields end up being less than 48 bpa (and assuming demand remains strong) then that old saying of “beans in the teens” may come back into the picture.
Be ready for any pricing scenario to occur as soybean yields are a definite unknown. Also be ready for an unexpected black swan that could stifle export demand.
Market volatility will continue in the weeks and months ahead!