Plowing Ahead in the Wake of USDA Report
Mar 12, 2012
While USDA’s updated US/World S&D balance sheets released on Friday, March 9th, 2012 were on the face of it, essentially neutral to perhaps bearish given the trades expectations, the markets response was robust. Despite the fact that the most noteworthy supply-side aspect of the report was a more aggressive cut in S.A. soy production, bringing USDA closer in line with private estimates, the demand side of the US soybean ledger appears to be in an imbalanced state.
An ongoing feature of the soybean market will be the trade’s collective reluctance to embrace USDA retaining a US soybean ending stocks number for the 2010/11 marketing year of 275 MB – a level that has remained unchanged in the past three monthly crop reports. Now take into consideration the fact that since December 2011 USDA’s forecast soybean production for Brazil and Argentina has been slashed by 12 MMT (441 MB). Factor in soy production losses in Paraguay into the mix and the net soybean production shortfall in S.A. swells even further.
So, we have a disconnect in place between a large reductions in S.A. soy production, while U.S. end stocks have remained steady during the same time period. That disconnect is squarely tied into one area of the demand side of the ledger - soybean exports. In fact, rather than being somewhat in sync, these two critical S&D elements are diverging. From December 2011 – March 2012, forecasted soybean exports for the current marketing year have actually declined 25 MB from 1.3 Billion Bu in December 2011 to the current 1.275. The latter number has been left unchanged since the January 2012 WASDE. Given an exceptionally strong soybean export pace, i.e. China, the odds favor an upward revision in US soybean exports (sooner rather than later) and an incremental reduction in soybean end stocks levels for the current marketing year ending August 31st. Declining soybean end stocks for the 2011/12 marketing year necessarily works to reduce supply for the 2012/13 marketing year. The net effect will amplify the critical necessity of maximizing both soybean acreage AND yield during the 2012 growing season.
Now it’s noteworthy that USDA’s release of its "officially unofficial" balance sheet for soybeans during the Agricultural Outlook Forum in February had seeded soybean acreage "penciled in" at 75 million acres for 2012/13. That number is uncannily at par with current trade expectations. But the root cause of trade concern heading into the 2012 growing season are end stocks levels pegged at 205 Mb – a full 70 Mb (25%) below the current marketing year. If realized, it would also place the stocks-to usage ratio at a quite uncomfortable level of 6%. One only has to do a modest "nip and tuck" with the soybean acreage or yield numbers before a potentially explosive price scenario emerges.
So, with a soybean market vigorously engaged in a battle to optimize seeded acreage, some in the trade are keeping an eye on the soybean/corn ratio. It is a widely used, but nevertheless imperfect, metric in gauging market sentiment on how row crop acreage needs to be allocated. The message the soybean/corn ratio is telegraphing to producers is simple and straightforward - maximize soybean acreage.
This telegraphing of sentiment is reflected in the chart below. The SX12/CZ12 ratio has moved from a low of 2.0 in early November 2011 (when S.A. soy production was indicated to be substantial) to the current vicinity of 2.30.
November Soybean 2102 / December Corn 2012 ------Soybean/Corn Price Ratio
Although this acceleration in the soybean/corn ratio is certainly a relevant market barometer, it does not provide any guarantee that this objective of summoning more soy acreage will be realized. Enticing acreage into soybeans ultimately rests in a vast web of both local and regional geographic variables with bottom-line economics being the common economic thread. Ultimately, it’s the producer’s break-even price ratio (BEPR) that drives the bulk of the decision-making process. Consider for a moment: input costs, local new-crop basis levels, pros and cons of crop rotation – and that is just a start. You know well your unique circumstances influencing your planting decisions.
Whether soy acreage can be boosted to levels above current trade expectations will not be known until the release of USDA’s Prospective Plantings report on Friday March 30th. The emphasis is on "prospective" here because the time window is wide enough for planting "intentions" versus "actual" seeded acreage to change. All things considered, the BEPR remains tilted in corns favor. And a substantial portion of the grain production community is already committed to corn - inputs have already been locked in.
That’s notwithstanding the dynamic price rally in both old and new crop soybean contracts since mid-December 2011. In fact, over that timeframe the soybean market there was only one occasion that the market was briefly knocked back - following the quartet of crop reports that were released by the USDA on January 12th. Other than that, new-crop November soybeans have traded from a low of $11.15 ¾ Bu (12/14/11) to a high of $13.15 Bu this past Friday, March 9th - a $2.00 Bu rally in some 13 weeks.
Some observations, of the "technical "variety are in order here, and I believe well worth noting:
- Always keep in mind that all grain markets are attracted to or repelled from $1.00 Bu price increments – those $1.00 Bu increments are where significant levels of support or resistance reside.
- This most recent rally to the $13.15 level on the November 2012 soybean contract also filled a downside gap left in the chart from September 21, 2011 – the slight intra-day retracements from the session high appeared as technical/profit-taking in nature and not a signal any fundamental shift in trend.
- Since the low of 12/14/11 the Nov soybean contract has created two "break-away" gaps – the 1st located at $11.53 (12/19/11) and the 2nd at $12.42 ½ (2/13/12). These gaps are bullish chart characteristics, particularly as they developed in the 1st Quarter of the calendar year. Going forward, mark them as significant reference points of support.
Also, on the technical side of things: there has been much chatter about the soybean market as being "technically" overbought. It’s very important from a marketing standpoint to place this aspect in perspective. I’d say, yes, based on a standard momentum indicator – the Relative Strength Index (RSI) the soybean market is overbought (on a daily basis). In fact, the RSI for November soybeans last week hit a level 15% above where it stood when the life of contract highs of $14 Bu were posted n 9/12/11. (Yep, the life-of-the-contract high for the November 2012 is $14 even on the button – a $1.00 Bu price increment. A mere random coincidence? In my humble opinion, I think not.) Remember, any market can persist in an extremely overbought (or oversold) condition for an extended period of time. Droughts, demand rationing rallies, getting speculatively short under such situations because the market is "technically overbought" can place one in a very unforgiving environment – to put it mildly.
Given current price levels producers should be looking to "reward the market" prior to the Prospective Plantings AND Grain Stocks report on Friday March 30th. If you’re looking to re-own some prior sales, I think you take a good hard look at bull spreading May call options. They will carry you well through the report (expiration is April 20th) and are less pricey owing to the less time premium. Why take old crop options to replace new crop cash sales? The old/new crop price performance profile is roughly in balance. Anything contained in the reports that would serve as a catalyst for an extension of the rally would likely be evenly distributed between crop years. Old crop/new crop soybean spreads have performed well as the soybean market has become more earnest in its commitment to "buy acreage".
Best to all,
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