I wasn’t expecting USDA to give the market bullish news on Nov. 8, and the agency didn’t. By holding its estimate of production unchanged and lowering usage for crush, the government raised carryout 15 million bushels, going against those in the trade looking for tighter supplies.
Lack of bullish news puts the onus for rallies squarely on what happens with China. The good news on that front is that the world’s largest soy importer is buying. But how long that continues is the make or break question.
Right now, the U.S. has an edge on cost. Our beans are cheaper than Brazil, which has little to sell anymore. That will change when new crop beans hit the pipeline this winter, and forward prices for February on give Brazil the advantage. State-run Chinese firms might go along with paying more if a trade deal gets done and buying U.S. beans is needed to seal the deal. But will other buyers spend more than they have to?
An extended U.S. selling season is crucial because despite recent deals, total export sales are well below normal. Total commitments are the lowest in eight years – they’re even below where they were a year ago.
The worst-case scenario, of course, is that the first phase of a deal never gets done and China maintains its trade barriers against U.S. agriculture. That doesn’t seem likely, but then again, nothing about this trade war met anybody’s predictions.
So, expect the market to ebb and flow on the daily headlines, at least for the next two months. USDA updates its production estimate Jan. 10, the final inflection point for rallies as long as weather holds in South America. It has been drier than normal in some areas, but so far crops in Brazil in good shape. Growers in Argentina are just starting to plant soybeans, but rains appear to be returning there too.
Farmers in both countries have every incentive to grow and sell as much as they can as soon as they can. You can thank politics for that. In Brazil release of jailed former president Lulu caused the real to sink near its all-time lows, under four-to-one against the dollar. Growers who price beans in dollars earn a windfall from a weak real, which is keeping soybean prices in dollars strong despite the pullback on the board here.
In Argentina, farmers are bracing for a return to Peronist rule in December by aggressively forward pricing their crops and pushing soybean plantings. Growers expect the new government to raise export sales on soybeans again but could face export restrictions on wheat and corn to control inflation. Of course, inflation got so bad the last time Peronists were in power producers horded soybeans as they only hedge against rising prices. That opened the door for a surge in U.S. soybean meal exports.
Meal is lagging right now but the star of the show in the complex is soybean oil. Thanks to a rally in palm oil caused by lower than expected production and strong demand, funds have extended their bullish bets on soybean oil futures with index traders buying a record net long position too. But vegetable oil prices in Asia are showing signs of topping out after a meteoric rise.
Basis in the cash market has firmed off trade war lows, so it’s time for a gut check on storage. Costs of production will vary widely with yields, but basis pushes from shippers trying to originate loads before river closing could be enough, with the Market Facilitation Program payment added in, to make money or at least cover cash costs. Carry in futures of six cents nets three cents after interest for on-farm storage. But futures tend to stagnate after Thanksgiving as the South American harvest approaches. That pattern could change this year with a trade deal but risking a lot on the prospect may not be prudent.
Soybean carryout could be a little stronger than USDA forecasts if China keeps buying soybeans but rallies depend on the market getting rid of trade war fears.
U.S. soybeans out of the Gulf are cheaper than supplies from Brazil, but that dynamic should change when new crop hits the market from South America.
Soybean sales and shipments are at an eight-year low, so an extended U.S. selling season will be needed to pick up the slack.
Crush margins for Chinese processors remain attractive as U.S. cargoes start to arrive.
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Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.