Despite election uncertainty, soybean prices surged this week, topping $11. Those price levels are the highest U.S. farmers have seen on the CME since the summer of 2016. Technically, $11 soybeans are a major pivot point for the market.
“If you look at a continuous soybean chart, soybeans don’t spend a lot of time between $11 and $12,” says Brian Splitt of AgMarket.Net. “That means we could be on the verge of a sharp, fast rally to $12 should USDA provide fuel with yield reduction and increased demand. However, if the USDA disappoints, we could be at a point where the market falters and waits for further guidance on South American weather.”
What drove soybean prices to top $11 this week? Splitt thinks in addition to the current good demand story, it’s also USDA pre-report estimates. He says that’s what spurred a 30-cent rally in soybeans last month just days ahead of the October WASDE release, and when pre-report estimates came out this week, it seemed traders were once again pricing in the numbers ahead of the official data drop.
On AgDay TV Ted Seifried of Zaner Ag Hedge shared a different review of the price spike.
“We didn’t plant enough soybeans,” he told AgDay. “If China was going to buy the soybeans in earnest to fulfill the trade deal, we could run out of soybeans. All of those things are running into fruition, but that’s not the news in the last two days. What is news, it looks as if the Republicans are going to keep control of the Senate, which means not a huge influx of new taxes. That’s good for the economy.”
While Splitt disagrees price action this week had much to do with the election, he agrees a tightening U.S. crop supply situation is providing the fundamental support the market needs.
“The unique situation we find ourselves in would be that the supply side of the balance sheet is contracting as we expect further revisions lower in the national yield while exports are expected to be revised higher,” he says. “The trajectory of U.S. exports will be affected greatly by the evolution of South America’s crop over the next several months. As of right now, our expectation of a strengthening La Niña would lend credence to the idea that additional exports to compensate for production losses south of the Equator will come to fruition. This could keep our corn export program strong into spring while Brazil focuses on shipping soybeans.”
Splitt says with the tightening supplies in the U.S., he wouldn’t be surprised to see Brazil return the favor and send some of their new soybean crop to the U.S. later in the marketing year to help assuage tight domestic stocks, especially if Argentina’s soybean crop stumbles and world soybean meal demand creates the need for strong US crush to manage the shortfall.
Tommy Grisafi of Advance Trading says Brazil buying U.S. soybeans was also a turning point in creating tighter domestic supplies.
“ATI analysts current estimates of total U.S. bean exports exceed the most recent USDA projections by roughly 150 million bushels,” he says. “[We] are basing that higher number on [the] current export and sales pace, and internal projections going forward.”
Waiting on WASDE
No matter what happens in the New Year, Splitt says all eyes will be on USDA’s November WASDE report, set to be released next week, to see how tight soybeans stocks become.
“Recent carryout estimates for next week’s WASDE report are now down nearly 80% from USDA’s initial carryout estimate for 2019/20 of 970mb, and 60% from USDA’s initial 2020/21 carryout estimate of 580mb,” he says.
It’s a similar story for corn, with tightening supplies feeding into higher corn prices on the board.
“Advance Trading Analysts are factoring an export number of 500 million greater than the USDA netting a ending stocks number of 1.5 billion bushels,” Grisafi says. “That would be the tightest stocks to usage ratio in years.”
Splitt says even with demand destruction with ethanol this spring, low corn prices helped cure low prices.
“When the ethanol industry temporarily faltered, our export program quietly made up for that loss of demand, and then some,” he says. “Throw in the lack of moisture in August and the derecho in Iowa to take some expected production offline, later in the growing season than what we’ve become accustomed to, and now we’re looking at over a 1 billion bushel swing in carryout expectations in less than a year’s time.”
He says the U.S. Ag Attaché to China recently indicated China’s corn imports would be 22 million tonnes (MMT) versus the 7 million USDA is currently using. AgMarket.Net thinks 8-10MMT has been sourced elsewhere, while the amount the U.S. has on the books is close to 11MMT.
“If that’s the case, demand revisions alone in the short term likely won’t be enough to bring carryout below 2-billion-bushels,” he says. “We will need South America’s crop to falter to pick up additional export demand later in the marketing year in order for the USDA to acknowledge it on the balance sheet. The caveat would be China’s appetite is bigger than we think, and their demand ends up being closer to 30MMT, which some in the industry have already suggested.”
Is this the Start of a Bull Market?
“The next couple of years will be a mish mash of supply versus demand, and whether or not the inflation some are expecting actually takes place,” says Splitt. “Planting more acres next spring could take the edge off a demand led bull market, so further increases in new crop values should be taken advantage of. The variable on the demand side is whether or not this is a one and done event for China with corn imports, or if we can expect to see Chinese demand for corn sustain a gradual increase year to year in the same vein as Chinese soybean demand prior to the trade war.”
“Even with wheat, a rising tide lifts all ships, and wheat became a solid feed ingredient,” says Grisafi. “That helped give life to wheat prices, as well. Now, it’s all up to Mother Nature and demand. Those to factors hold the future to higher prices. Yes, prices can stay elevated due to a weak U.S. dollar and new Covid-19 food scarcity means renewed world demand for high quality food.”
