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Market Commentary for 8/28/20
This week a bean trader told me, “it’s not a matter of if beans hit $10 but when.” With a little 2019 futures position left to sell, and all of my 2020 bean crop unsold, this was music to my ears. However, it brings back memories from 14 months ago, when the potential for $5 corn seemed like only a matter of time.
How Realistic are $10 Beans?
There are so many factors affecting prices, that it’s impossible to accurately predict when the high will occur. Instead, I prefer to make a list of why prices could go either direction, and then evaluate the likelihood of each scenario happening. This helps me when making grain marketing decisions for my farm.
Reasons to Be Bullish:
Inflation
This week the Fed said keeping the economy running and bringing unemployment levels down were a higher priority than keeping inflation in check right now. When inflation threatens, funds tend to gravitate to commodities. Recent metal market rallies may be an indicator of potential in the grain markets going forward.
Weather
50% of the bean belt had minimal rainfall over the last 2 weeks, a crucial time for berry fill and pod retention. Yields could decrease by over 10% from the early August USDA record yield estimates to trendline levels or maybe even lower.
Brazil Import Taxes
This week, the Brazilian government eliminated import taxes on several commodities, including soybeans. This means other South American countries could export their remaining beans to markets in Brazil. While it probably doesn’t make sense logistically for the US beans to trade into Brazil, it could be possible.
Exports
South America produces 60% of the world’s beans, and the US produces 30%. With Brazil nearly out of beans, and unable to produce any for another 5 months, the US becomes nearly the only supplier available for export through late January.
Price Potential
Between late 2007 and mid-2018, beans were below $9.50 only 10% of the time. Since the trade war started in mid-2018, beans have been below $9.50 most of the time. However, recent comments from government officials and continued Chinese purchases indicate Phase 1 of the trade deal has the potential to still happen. Friday’s bean close was back to the highest levels seen since January 2020.
La Nina
There is currently a 50% chance La Nina could form this winter. That weather event tends to negatively impact the South American growing season and could reduce yields in the Southern Hemisphere.
Dollar Value
The dollar has weakened compared to other world currencies, which could make our products easier to buy and help increase our exports.
$10 Profit Level
Generally, farmers need $10 futures with average yields to turn a profit across most of the country. This means many may wait for better prices before selling.
Reasons to Be Bearish
Yield
While there may be a yield decline from the current 54-bushel national yield estimate, it would be unlikely to decline 10%, below 49 bushels per acre, in one month. Even at 51, it would be a sizable crop and leave us with an ample carryout.
Phase 1 Trade Deal
There continues to be a lot of uncertainty surrounding trade deal goals and timing. There are many in the trade who suggest that it’s not logistically possible for China to buy enough grain to meet the goals set at the beginning of this year.
Weather
Forecasts are unpredictable. It wouldn’t take much rain and cooler weather to keep yields from dropping and taking the market lower.
Exports
With 50% of US beans exported out of this country, there is a lot of risk riding on international cooperation. Even when exports look promising, political squabbling and last-minute cancellations can always happen.
Harvest
Harvest will begin in less than 4 weeks in the northern belt. With an expected sizable corn crop mostly unpriced, beans may need to find a home. If prices are even close to breakeven, its possible farmers will sell the beans to generate cash and make room for storing their corn.
Brazilian REAL
While US currency has dropped compared to other global currencies, it hasn’t dropped much in relation to the REAL. The REAL really dropped in value versus the dollar last January and this took US bean prices down more than $1/bu in the first 2 months of the year. If the REAL continues to stay at current levels verses the US Dollar, then upside potential in prices could be limited.
Higher Prices
If prices rally, South American farmers will likely plant more beans. With this increased supply, lower prices would likely ensue. Planting the South American crop starts as we begin to harvest our crop.
Historical Perspective
In the last 13 years, the front month bean contract has been:
- Above $8.50 – 95% of the time
- Above $9.50 – 75% of the time
- Above $10 – At some point every year, except during 2019 due to the trade war
- Above $10.50 – At some point 12 out of the last 13 years
- Above $11 – At some point 9 out of the last 13 years
Final Thoughts
I’m optimistic on bean prices. If the US produces a 49.3 national yield average, which is the average yield over the last 5 years, and exports return to just pre-trade war levels of 2 years ago, the carryout next summer could be 250 million bushels. This would be 25% of last year’s levels and could make a price rally seem reasonable. Then, what if China honors the Phase 1 deal and/or South America has a dry growing season? Just a few things go our way, and $11 beans could become a reality for US farmers.
Want to read more by Jon Scheve? Check out recent articles:
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Jon Scheve
Superior Feed Ingredients, LLC
jon@superiorfeed.com
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