Grains closed mostly lower on Friday on profit taking but soybeans were up over 22 cents on the week and corn closed
up a penny.
Soybeans Bet on China Deal
Darren Frye with Water Street Solutions says soybeans are more than 50 cents off the lows and most of the rally has been tied to optimism about a deal with China that includes soybean purchases.
However, soybeans have been trading in a sideways range for more than a year and he says a China deal is really the only thing that could get soybeans to break out of the topside of that range.
“We know that China has not been buying our beans. And so we would need a three, four bushel drop in yield to make up for that and I don’t think that’s in the cards. Some of these soybean yields are record large out there. Others aren’t. But, you know, 51, 52 isn’t going to help us get out of that trading coil that we’ve been in for over a year,” he explains.
How Big Does the China Deal Need to Be?
With the soybean export window already closing, even if the U.S. got a deal with China how many bushels of soybeans could they even purchase as they have most of their needs met except for December and January.
Frye says, “I imagine there’d have to be some chips and technology and other things in that. And so if something got ironed out, even though we’ve lost a lot of our window of export that we normally would have until South America takes over again, maybe that doesn’t matter if they like the deal and have to buy beans. Maybe they buy beans into the time period where they normally would switch back to Brazil. It depends on what the deal is. It depends on the details in that deal, how iron -clad it is.”
That’s because China did not abide by the Phase One deal because of the “commercial considerations” clause that gave them an out.
Other Factors That Could Rally Soybeans?
The other possibility is a weather problem in South America and Frye says the likelihood of that is not great either.
“And usually you don’t have a weather problem in South America. And if you do, it would be more like the latter part of December into January before the market would move. So I think if we’re going to break out of that box, it’s going to have to be a deal with China,” he states.
Soybean Charts Point to $11
If the U.S. gets any sort of deal Frye says technically the soybean charts could stage a breakout and quickly see a rally.
“We start trading above $10.85 on a closing basis a weekly or a monthly closing basis by next Friday. I mean, I would think that you’re going to have some momentum to move, you know, at least up in 11s. And we’ve all heard like beans don’t like the 11s, right? I’m not saying they always stop at the 11s, but typically they do not, they go clear to the 12s. And so my projection out of that box, if you look at geometric targets would be in that $12.50 to $12.75 area, six to nine months down the road,” he explains.
If Soybeans Rally Over $11 or $12 Will Corn Follow to $5?
Frye says the best shot corn has to stage a sustained rally and get out its trading range is on the heels of soybeans. “Yeah, having beans go to $12.75. Yeah, that would help corn.”
If soybeans get above $12 could soybeans follow and get to $5? He says only if ending stocks can fall well below 2.0 billion bushels.
“That doesn’t mean that we rally. That just means that takes away the bottom side, and maybe get a rally to $4 .75, $5 max.” he says.
Corn Chart Not as Constructive as Soybean Chart
He says the chart pattern is less bullish for corn than for soybeans.
“Because remember last February when we were shrinking the old crop balance sheet and of course we had that January port where they lowered it four bushels. That’s when we ran old crop corn up to about $5.20. New crop got to like $4.76. And that really stretched out that that coil. What we have in soybeans is a much more defined coil for over a year. And so I don’t think we bring in, you know, a break of anything in corn until we get over $5.20. So that’s a ways away,” he adds.
Other Factors That Could Help Rally the Corn Market?
Other fundamentals that could support a corn rally include higher crude oil prices, lower yields and strong demand or a combination of the three.
Frye thinks national corn yield is coming down substantially and it alone could get carryout below the 2.0 billion bushel mark.
“I think production will be down, you know, into the 175 -180 at a minimum, and that could put ending stocks in the 1.6 to 1.8 billion bushel category, depending on how we move demand numbers around. We’re not going to get as tight as we were last year, in my opinion,” he says.
Deflation Worries
Frye also cautions farmers that one limiting factor for grain prices and farmer profitability is if the economy moves from stagflation to deflation.
“But we’ve been in a stagflation environment where unemployment is kind of rising, the economy is weak and get a weak impulse. It’s a weakening impulse and then you have really an inflationary situation where prices are going up and that’s what’s brought the pain of the farm community. Our inputs keep going up but the outputs that we produce are corn beans wheat cotton really everything but cattle and feeder cattle have been really below the cost of production and so that’s painful but we don’t want to drop into deflationary cycle because that could bring new lows across the board in all of our markets that have been struggling to get back above the cost of production.”
