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For weeks now I have been writing about the differences between soybean export sales and shipments. The choppy trade recently is evidence that there is a battle playing out in the market between the short term and longer term fundamentals. On one hand you have very strong export sales which have now reached over 93% of the current USDA export estimate and the potential for a tighter balance sheet. On the other hand you have good weather in South America and the potential for the largest world soybean carry over in three years by a good margin. For now it seems that the trade sees a need to ration soybean export sales, the problem is that in the long run many of the sales could be canceled or switched if South America has a good crop.
Export sales for the marketing year starting in September have been on record pace and have already reached 93% of the USDA's export estimate for the entire year. Sales have stayed strong in spite of higher prices suggesting there is massive global demand for soybeans that will not be deterred easily. If export sales continue to be as strong as they have been so far soybeans for export will quickly eat up the 170 million bushel carry over the USDA is currently projecting. In fact, if soybeans were to average 50 million bushels of export sales a week, like we saw last week, the US would have a negative carry over in less then 6 weeks. If this were to happen soybeans may need to push to even higher prices then the record high prices set last summer to ration demand and maintain some sort or positive carry over. What price this would happen at is anyone's guess, but so far soybean demand has been fairly inelastic from an export sales point of view.
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As I have highlighted in recent articles the problem with this scenario is that although export sales are very strong, export shipments have only been slightly stronger then last year even though the soybean supplies were short at this time last year due to the drought. As of the last export sales report shipments this year have only been 6 million bushels above this time last year even though sales are well over 300 million bushels above this time last year. Now, a late harvest could certainly account for shipping delays and export shipments could start to catch up to the export sales numbers. But, there is also the chance that a good portion of the sales that have been made may never leave our ports. It is a possibility that countries such as China have decided to "hedge" South America's crop by buying US beans at current prices in case there were a problem in South America. There are not enough soybeans in the US to satisfy global demand and if major issues were to arise with the South American crop like we had in the US last year the sales being made now would be at great prices and global end users needs would be filled for a while. But, if South America ends up with a good crop many of the US export sales that have not been delivered could be canceled or switched to South American origin.
The trade seems to understand both of these points. While export sales might suggest that the US will run out of soybeans this year, export shipments only reflect a modest increase in US exports. The problem is that countries could either take delivery or cancel shipments at any time. So in the mean time soybeans may need to price ration export demand now and worry about cancellations later. But, if countries are buying soybeans now to hedge against a catastrophe situation then are they really that price sensitive? If the potential is there for soybeans to hit $19 if South America has major production issues then who is to say countries would not keep buying soybeans at virtually any price as long as they know they can cancel later if catastrophe is averted and prices go lower. There would likely be a cap at some point as profit margins begin to suffer and global end users decide they have enough bookings but it is difficult to project at what price level this would begin to happen. This could set up for a wild ride in soybeans for months to come, but there might not be a good way around it.
Soybean prices may need to go higher for now to slow down export sales. This would likely be an opportunity for producers to sell at very good prices. If South American weather stays good (as it is nearly ideal at the moment) soybeans could fall hard if there is a massive cancellation or switching of US export sales. So, as it seems to be playing out this could be good for the savvy US producer and South America could be the ones who get hit with lower prices as they get into their harvest. Keep an eye on South American weather, but if things look good as we get into the new year it may be a good time to take advantage of the Export Sales Bubble.
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December Corn Daily chart:
January Soybeans Daily chart:
December Wheat Daily chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!
Ted Seifried (312) 277-0113 or email@example.com
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Futures, options and forex trading is speculative in nature and involves substantial risk of loss. This commentary should be conveyed as a solicitation for entry into derivitives transactions. All known news and events have already been factored into the price of the underlying commodities discussed. The limited risk characteristic of options refers to long options only; and refers to the amount of the loss, which is defined as premium paid on the option(s) plus commissions.
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