Soybeans closed higher on Thursday after the weekly sales report showed more old-crop soybeans sold than expected. A total of 577,000 MTs of 2013-2014 soybeans were sold between Jan 24th – 30th. China was the biggest buyer adding 256,400 MTs in new purchases after switching 180,000 out of unknown. The market has been waiting for Chinese cancellations, not a large order of additional purchases. This helps explain the strong rally in spreads over the past few days.
So what does this mean exactly? Let’s breakdown the total export numbers to show how tight our domestic soybean carryout is. Total accumulated soybean sales for export are reported at 43.022 million MTs or 1.581 billion bushels. This is 131 million bushels more than the USDA has written down for their latest official estimate (January WASDE). This estimate could change on Monday’s WASDE report which comes out at 11:00 am. The problem is we can’t just allocate those sales as definite. For one we won’t see a carryout near zero it will just result in more price rationing until we see more imports, less crush, or cancellations. The market is predicting that some of the current sales will be cancelled or rolled into 2014 which is the same thing. We could also see some soy and soymeal imports from Argentina because the margins are getting close to penciling an arbitrage profit. This would help increase our carryout levels but we aren’t ruling out seeing a drop to 100 million bushels carried to 2014.
While US carryout is very tight the world supply is starting to become very abundant. Early beans in Brazil are already yielding well above last year, which was also a record crop. Argentina was hit with some dry weather this year but overall is still expecting a decent crop. The Argentine economic situation is a disaster. Their peso has been collapsing and has resulted in slow movement of grain as farmers hold out until they need to sell or are confident that the currency has stabilized. Eventually Argentine farmers will need to make way for the next crop just like in the US. This will in turn reduce the extra demand that has been shifted to the US as a result.
The market may choose to focus on the abundant world bean supply or the unknown of old crop soybean carryout in the US on the upcoming report. Either way we have a chance to see a volatile market response in either direction. Soybean option volatility looks low at 16-17% which means using long options as a hedge may still make sense.
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