For the week March corn was 1 ½ cents higher, December corn gained 6 ¾, March soybeans climbed 17 ¾, November soybeans were up 19 ½, March soybean meal was $5.60 higher, March bean oil tacked on 175 points, March soft red winter wheat ended 19 better, March hard red winter wheat was 11 ¼ higher and March hard red spring wheat was up 2.
Soybeans were 18 to 19 cents higher for the week and have gained nearly 70-cents in the past two weeks riding the China wave. The first wave came last week from a surprise post by President Trump that China had agreed to buy another 8 million metric tons (MMT) of old crop soybeans.The second wave came after a story in the South China Morning Post said that the U.S. and China would possibly extend the trade truce for another year when the leaders of the two countries met in Beijing in April.
The China Effect
Jerry Gulke, president of the Gulke Group, says many are skeptical, based on past experience, that China will honor the deal to buy the additional soybeans for this marketing year. “You and I have talked about the fact that the Phase One was based on a dollar amount and they had an escape clause that said if the price is right and they need it, China will buy our soybeans.This time it’s actual bushels.I think Trump learned his lesson.”
Conventional wisdom would tell you China has no economical reason to buy U.S. soybeans in the gut slot of Brazil’s record soybean harvest and with prices $1.00 below the U.S. However, Gulke says the purchases are all political and China will buy this time regardless of price. “So, we have that 12 MMT that most people thought they weren’t going to do. Well, they did it. And they’ve had it covered, probably started covering it in October when we had the $1.40 rally. Then it peaked and went down,” he explains.
Gulke contends that after soybean prices dropped and the rhetoric of how bad things are in agriculture that’s when President Trump asked China to buy 8 MMT more. “And this is the art of the deal, I guess. And for those of us that negotiate land and prices for goods, we know what he’s talking about and what he’s doing,” he adds.
President Trump needs to buy votes with farmers and so he brokered a deal with Chinese President Xi.“I don’t care how much more our soybeans cost verses what Brazil is going to sell them to you. You’ll probably get a $10 billion reduction in the tariffs for your country. To me, this is an investment. It’s kind of like hedging grain.”
Gulke says China is making an investment of 8 million metric tons of soybeans which may have a value of $300 million. “That’s like spitting in the wind compared to what they’re going to gain from what Trump is going to do for them as a reciprocal thing. And that word reciprocal, we need to keep that in our heads. And you don’t fight the guy that’s got the checkbook.”
Soybean prices have quickly responded because if you do the math, another 300 million bu. of soybeans sales to China will quickly take the 350 million bu. ending stocks on soybeans down to pipeline supplies.“You’ve got a problem. You don’t have enough beans if they buy 8 million metric tons in this season. And this season means this marketing year.”
Gulke says if that happens and farmers don’t plant 3 million more acres of soybeans, the U.S. will run out of supply.“So, it’s not a surprise to me that we’ve seen soybeans rally this week like they have,” he adds.
Will Soybeans Retest the November Highs?
So how far will the rally in soybeans extend to price in this demand shock? Will prices retest the highs set back on Nov. 18 at $11.72 ½? Gulke says it is entirely possible, “If you take 8 million metric tons off the balance sheet, like you said, that puts us down at pipeline supplies.”
Technically he says the charts look bullish, even with the slight pullback on Friday.“Believe it or not, we had a gap higher today in the March futures of a quarter of a cent. We pulled back and couldn’t fill it, came close. But it closed up near the highs of the day.”
Gulke says March soybeans put in a high on Nov. 18 at $11.72 ½ after rallying $1.40 on news that China would be buying 12 MMT of U.S. soybeans.The market peaked that day after seeing a flash sale to China of 792,000 MT of soybeans.“That’s because the market was looking ahead already from October saying, well, if they buy X amount, what would that mean price wise? And it, it achieved that price. Then it was over and then everybody said, well, that’s it. They’re not going to buy any more and they may not even buy that.”
What Do the Charts Say?
During that time soybeans were working on a head and shoulders pattern on the charts and fulfilled it on Nov. 18 according to Gulke. “We had a right shoulder and left shoulder. It was that right shoulder, which says, all right, the market predicted a price back in the $11.72 area. It then turned around and went down a $1.40.”
The soybean market is now starting to retrace the move. So, will it retest that high? Gulke says, “Now the key is not so much the high that we made, but the secondary high, the right shoulder, so to speak, can you exceed that? Because that was the real test of what was going on. And I think the market will look at that and say, what’s it going to take to attract bean acres away from corn?We can afford to lose corn acres and if it’s only 3 .8 million, you’re probably going to run out. So, we need to do something rather quickly.” Otherwise, he says by the end of March when the USDA Planting Intensions Report is released it could say $12 didn’t make a difference to the farmer.“ The market’s going to try to soybean buy acres, especially since Trump and Xi are going to meet in April,” he explains.
Watching for Flash Sales
Gulke says China goes on holiday the next week or so, but he will be watching for flash sales to see if China is really going to buy this additional 8 MMT of soybeans the President touted. “If you’re going to meet and you’re going to put on your best face to Trump then you’re going to buy some beans going into that meeting and you may even honor the 25 MMT for 2027 and 2028. I doubt they are going to renege on that.”
Gulke says if you plug those numbers the soybean market gets pretty exciting.
Funds Adding to Long Position
Managed money has also increased their net long position over the past two weeks.Friday’s CFTC Managed Money Futures Only table shows that as of last Tuesday the funds are long in soybeans 115,896 contracts which is up a whopping 86,743 contracts from last week.Gulke speculates the funds likely added more at the end of this week as open interest has been rising sharply in the soybean market which is an indication of new money.
Gulke thinks funds could buy more soybeans.“They’ve got a way to go yet.If you look at the last seven days of volume, it’s been maybe double or triple what it was any time in the previous three months in any given day. Somebody is buying, obviously, we saw that today, the large specs are buying. And they’re buying our panic sales that happened probably when the market fell $1.40 and people missed the top,” he explains.
Marketing Advice
Gulke has heard plenty of criticism by farmers about President Trump and the woes in farm country but he says farmers need to be prepared. “Sometimes you’ve got to be a little bit patient. The worst thing you can do is get on the wrong side of the market and say I’m going to sell out on the first rally again. ”However, there are some producers that are short or bought puts and are watching the market make new highs for the move the last two weeks.
Farmers have been selling soybeans on the rally. Gulke advises that if farmers can make money at these levels, it warrants a sale.However, he says farmers need to be in control of their inventory and see how this plays out.He says President Trump likes “the art of the deal” which results in a negotiation process where he and the other party both leave happy and that they gained something.“That’s what Trump is good at. It’s taken us a long time to figure this out. So. we’ll watch and see what happens.”
Gulke thinks there’s also a good chance down the road that China buys corn because Trump said he also wanted them to like them to consider buying other agricultural products.That could finally be the catalyst to get corn ending stocks under 2.0 billion bu. and spark a much needed rally in the market.
For more information contact Jerry at info@gulkegroup.com.
