What Went Wrong in the Soybean Market?

November 28, 2012 03:28 PM

Monthly supply-demand reports were especially important this year, particularly for soybeans in September, October and November. Bullish traders were waiting in the wings for each new bit of news to extend upward movement to $20, but it didn’t happen! The soybean chart (at right) is a classic—marking the end of a bull market.

The September report suggested demand would need to fall nearly 500 million bushels compared with 2011 to maintain pipeline supplies of 115 million bushels. Many thought the U.S. might even have to import soybeans in the second quarter of 2013.

Bulls rejoiced that most of the soybean production increases in each of the reports were absorbed by increasing crush demand and didn’t flow directly to carryover. That seemed bullish, but it wasn’t. The hidden facts have now been revealed.

The September crop estimate had beans at 35.3 bu. per acre, with production at 2.634 billion bushels and demand at 2.670 billion bushels. After factoring in last year’s ending stocks carried into this marketing year, USDA estimated carryover at 113 million bushels. In October, bean yields increased to 37.8 bu. per acre, production to 2.860 billion bushels and total usage to 2.920 billion bushels—putting carryover at 130 million bushels. November’s report increased yield to 39.3 bu. per acre and production and usage to 2.971 billion bushels and 3.021 billion bushels, respectively, increasing carryover by only 10 million.

September’s supply-demand outlook was thought to pose a near impossible task to curb demand to 2.670 billion bushels without severe price rationing. Later reports increased supply, filling that void. Crush increased, with exports up from 1.055 billion to 1.345 billion, enough to facilitate China’s expectations and non-Chinese imports and have leftovers.

It is not that increased production was sucked up by demand—that was the good news. The negative is that soybeans can now meet reasonable demand and have some left over for a surprise increase of 25 million bushels, price rationing at $17 was not needed.

The soybean complex finds itself in the unenviable position of needing a crop problem in South America, not a megacrop. A rebound of some magnitude will occur, perhaps going into the critical 2013 growing season, which starts in early December. Even a dead cat will bounce if dropped from a high enough level; however, a retest of 2012 highs is unlikely, especially with two monthly supply-demand reports ahead.

Conclusion. The global bullish story in soybeans was dealt a blow. Concern emerges with 2013 crop pricing. We have enough farmland to plant 100 million acres of corn, with sufficient soybean acres left to meet demand should South America come through and weather normalize. It’s a long way to harvest 2013, but this is a futures market and while doing nothing and watching the price rally later worked before, it is dangerous to suspect a three-peat! Flexibility in marketing and the law of supply and demand have not been repealed.

Our price discovery free-market system is alive and well. Let’s hope we don’t have to discover a price to buy back export demand from those we incentivized to expand production.

Jerry Gulke farms in Illinois and North Dakota and is president of Gulke Group Inc., a market advisory firm with offices at the Chicago Board of Trade. Gulke Group recently published Technical Analysis: Fundamentally Easy. For information, send an e-mail to info@gulkegroup.com or call (815) 520-4227.

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