Demand has been the real driver of the soybean complex, but is it stable or elastic demand? Demand for domestic crushing, which produces soybean oil and meal, the primary ingredient from soybeans, is very stable, or inelastic. Since 2009, crushing increased an average of 45 million bushels per year or a solid 268 million to reach 1.93 billion in 2016. Crushing demand should be stable this year due to head winds in trade policy, limited livestock growth and competition for soybean meal.
Export demand for soybeans has been the real driver. Exports grew to 2.1 billion in 2016 or a jaw-dropping 830 million bushels in six years with an average increase of 138 million bushels per year. For perspective, a 138 million bushel per year increase with a 50 bu. yield implies a 2.76 million acre increase yearly to service the demand.
Will 2017 be a transition year for exports? It appears China will continue growing their domestic livestock sector to feed domestic usage. Will there be any adjustment in trade policy with China under the new administration? Let’s assume a conservative export pace at 2.05 billion bushels but understand it could reach 2.15 to 2.2 billion later this year.
Early reports from across the country indicate there’s a lot of interest in planting more soybeans this year, especially out west. The price relationship of November soybeans to December corn in excess of $3 to $1 has only happened about seven times in the past 40 years. How much will soybean acres increase? We could see a huge increase of 5.3 million planted acres to 89 million acres. Yes, that’s a huge number!
We have seen solid yield growth in the past decade. In 2008, yields were at 39.7 bu. per acre and topped out in 2016 at a record 52.5 bu. This 12.8 bu. increase has helped offset the significant export demand increase. I expect yield will remain stable to slightly lower at 49 bu. per acre.
We appreciate stable demand but the increase in acres will pressure soybeans by possibly increasing stock levels to more than 700 million bushels. To turn the market back to a more bullish $12 price, we’ll need to reduce stock levels to less than 200 million, or 500 million bushels if acres reach 88 million harvested. To get the reduction, we’ll need a yield drop to less than 43 bu. per acre. It’s not impossible, but everything would have to go just right.
The expected impact on soybean marketing includes:
- There will be periods of price weakness in new crop soybeans in April and May when we confirm an increase in acres and in August and September when the crop is actually confirmed. A long soybean meal position is only suggested for summer needs.
- Spread traders favor a long December corn/short November soybean spread position. Speculative traders will favor a long July/short November spread. Place the spread in early February and hold until mid-June. If cash is sold and you need weather scare protection, bull spreads will be better for farmers than buying out-of-the-money calls.
- Carry will increase in the soybean complex, so hold hedges in the November contract rather than deferred contracts, which is completely opposite of what’s suggested in corn.
- Aggressively sell November soybeans on any price bounce between $10.20 to $10.40. Place limited cash flow dollars into a corn hedge plan. Instead, sell cash soybeans off the combine even with a wide basis at harvest.
What works for corn in 2017 might not work for soybeans. We haven’t experienced this marketing pattern in some time. The only way to be properly positioned is to act before the events unfold rather than wait until the crop is stored in the bin.
Any opinions expressed herein are subject to change without notice. There is a significant risk of loss in trading futures and options, and trading might not be suitable for all investors. Those acting on this information are responsible for their actions. Contact Bob Utterback at (877) 898-4324 or firstname.lastname@example.org with questions/comments. See full disclosure at www.FarmJournal.com.