May 31, 2016
The latest USDA Crop Progress Report showed 73% of the soybean crop is now planted, which was right in the middle of trade expectations, and just slightly ahead of our historical pace but nothing to excite the trade. The big question still remains: How wil the front end of the market respond once the funds begin to more aggressively roll or liquidate their long positions?
Many fundamental insiders believe they roll aggressively to new-crop contract, because that's where the more traditional bullish story will arise if U.S. producers are thrown a weather type curve-ball. Personally, I think the funds stay a bit more front-end loaded and roll more than we would suspect into the AUG16 and SEP16 contracts. Remember, a large portion of the crowd that's currently in the game tend to like the thinner markets and seem to have a much more event-driven mindset.
Several of the larger players appear to be cross-hedging geopolitical risk that could negatively impact their recent bullish bets in the emerging markets. In other words, they are not speculating on a late-summer weather event here in the U.S. but rather more nearby headlines that could be associated with logistical complications and hiccups inside Argentina and Brazil.
While the U.S. crop is being grown in the ground, the world is dependent on Argentina and Brazil to deliver supply. The problem is recently elected President in Argentina, Macri, who is trying to implement radical change but is being sharply opposed by public sector unions and labor forces. Since taking office, Macri's government has supposedly trimmed a net 12,000 jobs from the public payroll, while the private sector has lost thousands. Forecasts for annual inflation in Argentina are now up around 35-40% and moving higher. The higher input costs have squeezed local business margins, and unions have registered over -140,000 jobs being lost between January and April.
At the same time, the current President of Brazil, Rousseff, has been suspended from office and facing a very high probability of being impeached, which could create major social unrest and extreme uncertainty inside the Brazilian borders.
What we have to understand is that there has been a lot of big-money placed on the table and put behind the hopes of change for these two nations. I have to imagine if the new leaders can somehow turn things around there is a fortune to be made by investors who have been willing to be buyers at the bottom. Just keep in mind these very same investors are extremely smart and constantly looking for strategies and ways to "cross-hedge" and protect their downside exposure, i.e. "long the soybean market."
From where I sit, the new-crop NOV16 contract and a U.S. weather story are simply icing on the cake, but certainly not of their primary interest or concern, hence the reason I believe a larger portion than we think, stay "front-end" centric. As a producer, I feel lucky to have been able to reduce a large portion of our new-crop price risk at profitable levels. I'm sure I will be kicking myself if prices continue to rally higher, but from a risk-management perspective it's clearly the right move and fits our longer-term goals and business objectives.
I continue to monitor the NOV17 contract, hoping I will eventually see prices move north of $10 per bushel, giving us another opportunity to reduce a bit more longer-term price risk. As a spec, I continue to stay on the sideline believing their are much easier shots to take.
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