Deconstructing Soy Complex Support
Mar 15, 2013
Price action during the past week has validated the "Near Term" price constructive aspects presented in the March WASDE (3/8) for old-crop corn and wheat. The soy market is another whole story. Price radically departed from what was in essence a supportive balance sheet. As it stands, WASDE’s bottom-line end stock numbers of 125 Mil Bu for soybeans and 632 Mil Bu for corn were not then, and are not now "neutral".
Yet, post-crop report price strength in the soy complex has proven entirely fleeting. Despite the May soybean contract closing at the 3rd highest price level seen in over 4 months - $14.8050 Bu on Monday 3/11 – it ended up losing $.5450 Bu (-3.7%) on the week, settling at $14.26 Bu. Soymeal, arguably THE leader of the soy complex price with a sturdy fundamental and technical foundation, dropped significantly. May soymeal ended the week down $17.40/ton (-4.0%) to settle at $419/ton.
RATIONALE FOR SOY WEAKNESS
The blink of an eye, short-lived nature of old-crop soybean strength appears to signal that the market has come to accept the idea that a long awaited transition in export demand from the US to South America is firmly at hand. Recently, the market had been telegraphing via price behavior, skepticism on the sustainability of old-crop soybean and soymeal sales. Whether in the form of a daily soybean sales announcement released under USDA’s mandatory reporting system, strong weekly export sales, or robust export shipments – the price response to bullish demand news was invariably skittish. The market was found wanting in its ability to sustain rallies on fresh and presumably bullish demand news.
So the apparent error in my assessment – that the WASDE numbers should have been supportive to price in the Near Term - requires to be properly and straightforwardly addressed. In essence, on my part the notion was a considered subjective sense that the "transitional window" of export demand would remain cracked open for a short while longer. Consequently, an emphasis was placed on "Near Term" price support in the 3/8 post. But by no means was this time horizon definition of "Near Term" thought to exist for a day or two. Be that as it may, following this past week’s price action it appears that the window for elevated price levels is nearer to being closed, if not already being a fait accompli.
PILING ON WITH BEARISH NEWS
A market reacting indecisively to bullish news can be expected to fare poorly when confronted with less-than-bullish and over-the-line bearish news. And there was nothing fundamentally bullish offered up during the past week.
1.) Monday’s (3/11) soybean export shipments of 17.114 Mil Bu were below the low end of the range of trade expectations.
2.) Thursday’s (3/14) net export soybean sales of 783,700 MT’s (for the week ending March 7th) came in at the lower end of trade expectations. And despite 657,700 MT’s (24.16 Mil Bu) were clustered within old crop sales. China’s portion accounted for 183,500 MT’s (6.74 Mil Bu) - 28% of the total.
3.) Soymeal sales of 51,700 MT’s represented a dismal marketing year low and were barely 20% of the volume seen just two weeks ago.
4.) Friday’s (3/15) NOPA soybean crush stats for February (136.6 Mil Bu) fell below the low end of the trade expectations, as well as being down 22 Mil Bu from Jan. Crush indeed. Kind of a coup de grace to end the week.
HOW BEARISH IS IT?
Before leaning a too forward on the ski’s here, there were interesting and what appear as being not in the least bit bearish twists, in the latest soybean export sales report. The numbers pushed current marketing year export sales (shipments + outstanding sales) to 1.304 Bil Bu. We’re going to return to the implications of the two categories – "shipments + outstanding sales" – shortly, because their relationship is decisive in bringing the challenge of future rationing of export sales demand into clearer focus.
Consider that USDA has held fast to a soybean export forecast of 1.345 Bil Bu for several months, even as the sales pace was dramatically accelerating. Now, with 24 weeks remaining in the marketing year (which runs through August) sales are at 97% of forecast. Some quick, back of the envelope, calculations reveal that something has to give – like in an eye-popping way. The market believes this disproportionately front loaded sales picture will be corrected and aligned to the forecast over time.
Similarly, while the most recent soymeal sales tally was dismal, as with soybeans, some insight can be gleaned by parsing the sales numbers to date (3/7). There are 7,523 TMT’s currently committed versus USDA forecasted sales of 8,074 TMT’s. So, current marketing year sales stand at 93% of forecast. The marketing year for soymeal runs through September, so 28 weeks remain. Unlike soybeans, USDA did raise their soymeal export forecast in the March WASDE - by 100,000 short tons to 8,900. Remember, WASDE soymeal export sales forecasts are expressed in short tons, while USDA’s Foreign Agricultural Service reports soymeal sales in metric tons. It can get a bit befuddling, but the conversion is 100,000 short tons = 90,700 MT’s.
RECONCILING SOYBEAN EXPORT FORECASTS IN 2nd HALF OF THIS MARKETING YEAR
The pathway to reconciling the extraordinary high export sales commitments in soybeans and soymeal is basically two-fold.
1.) Reduce future export sales (dramatically)
2.) Shift existing sales on the books to South America, i.e. cancellations (dramatically)
Both are required if the current forecasts for the 2012/13 marketing year soybean and soymeal exports are not to be exceeded. The rub is that the "shipments" portion of soybean export sales currently stands at 1.164 Mil Bu (89%). These are soybeans "out the door" – they are gone. Sales on the books "outstanding commitments", yet to ship, stand at 140.6 Mil Bu (11%).
It is this last category that warrants ongoing scrutiny. Of that 140.6 Mil Bu, China accounts for only 41.4 Mil Bu (29.5%) of the total. That is an exceptionally light tally in both actual Bu terms, as well as percent of total. For a relative comparison/contrast we need go back to this same timeframe in 2010/11 when Brazil harvested a then record 75.3 MMT’s of soybeans. The week ending March 3, 2011 China’s "outstanding commitments" in soybeans from the US stood at 136.5 Mil Bu (46%) of a Grand Total of outstanding commitments of 296.4 Mil Bu.
The difference between US soybean export prospects at this time 2 years ago is stark. The numbers speak for themselves. The driver of US soybean export sales has a very light footprint in 2013, compared to 2011. The idea that USDA’s forecast of 1.345 Mil Bu of soybean exports must ultimately be exceeded is not supported by recent, relevant, and rather parallel circumstances that existed in this timeframe two years ago. They haven’t budged on their soybean export forecast since November; there is not any compelling reason for them to do so in the foreseeable future. The USDA stands on firm ground.
Now will China ultimately increase their net old crop sales bookings with US, in light of the massive crop coming out of South America? Most certainly. The extent in which existing commitments, as well as forthcoming sales, are shipped is another matter. Presently, a lagged shipment pace out of Brazil is the principle glue keeping the actual US soybean exports together. Those are wrinkles that will be ironed out soon enough.
As the price behavior of the past week has more than hinted, the market is well into an anticipatory mode on the export sales pace. It is not a question of if, but rather when the sales/shipment flow subsides. For producers holding onto old-crop soybeans, this appears more likely to evolve as price erosion. Identifying price resistance levels is likely to be easier, than those areas of support. Don’t believe that everything is going to Hades in hand basket at once. But it seems this idea of Near-Term support has now passed all too quickly.