Soybean prices pushed higher again Friday, with the May contract closing at $10.71 per bushel.
Once again, weather premiums in South America are driving a lot of speculation…
Just how high can soybean prices go?
In Brazil and Argentina, we’re hearing cases of farmers holding onto their soybeans in a quest for the equivalent of $11.00 USD per bushel.
Argentina’s ongoing drought continues to drive analysts’ expectations lower. We’re looking at real possibilities of a 39 MMT soybean crop and 31 MMT corn crop for the country, and this is providing support across both markets.
This week, on Thursday, March 8th, the USDA will release its monthly WASDE report, and a lot of focus will turn to crop production numbers in Argentina. We anticipate that the agency will be more conservative with its reduction than many analysts.
Our reason is based on and biased to history. We’re going to look at two distinct drought events in Argentina that have impacted soybean prices previously.
Having a better understanding of how the USDA adjusts its number can give us a better understanding of how speculators (and not just supply) is pushing prices up.
Soybean Production Estimates in 2007 through 2009
The period of 2007 through 2009 was marked by pronounced dryness and heat across Argentina.
However, the USDA did very little in terms of altering its production output numbers for either of South America’s largest soybean producers. As the chart indicates below, the USDA held Argentina production at a constant of 47 MMT. Meanwhile, final production in Brazil matched its predictions from earlier in the marketing calendar.
Now, I put those numbers in front of you first because I want to show you what happened to soybean prices in 2007.
The first few months of 2007 were marked by significant speculation. Drought conditions persisted and Argentina’s annual production declined that year by 2%.
But those two factors alone couldn’t produce the spike you’re seeing above.
Other key factors at the time included the surge of oil prices to near $100 per barrel, a 17% jump in U.S. exports, a weak U.S. dollar, the 2007 renewable fuels/ethanol mandate, and excessive futures speculation in the commodity markets as equity dollars rushed into commodities.
In 2008, you’ll notice that soybean prices came back to earth, literally dropping in half in a matter of 5 months from $16 USD / bushel in February, down to $8 by July.
But there are two interesting things to note about the sharp downturn that returned Chicago soybean prices back to January 2007 levels.
Speculation in the commodity markets picked up at a breakneck pace. We watched oil prices in 2008 surge to $145.85, while Goldman Sachs predicted $200 per barrel. But it wasn’t just the oil markets that had picked up steam.
“In the first 55 days of 2008, speculators poured $55 billion into commodity markets, and by July, $318 billion was roiling the markets,” according to Foreign Policy. The influx of capital is noticeable in the first two months of the year in the pricing chart above (and the main reason why soybean prices hit $16).
But things became very bearish, very quickly through the spring and summer months. We watched soybean prices pop in the month of January and February in 2009. While the international economy was melting down around us, soybean prices held at nearly $11.00 in March 2009.
The numbers out of South America certainly played a role. The USDA held its 2008/09 soybean projections at a constant level heading into 2009, but a sharp, surprising cut pulled soybean production down from 49.5 MMT in January 2009 to 43.8 MMT the following month in February.
It’s critical to note, however, that after this cut occurred, prices actually declined. This suggests a few things. First, farmers or individuals who held contracts took gains off the table after the big cut came. Second, it’s possible that the expected cut had been baked into the price ahead of the report. This is a key thing to understand.
As the Argentine soybean harvest started up in late March and finished in May, the damage was already done and anyone looking for premiums seen earlier in 2009 had missed their shot.
What About Argentina’s 2015/16 Drought?
There are no shortage of headlines saying that the 2015/16 drought in Argentina was the worst in 100 years. But what happened to soybean prices as a result of this drought…
And what did the USDA do with its projections?
We watched soybean futures hit an early bottom in September 2015. Even though we saw persistent concerns about weather in South American, the USDA took its sweet time making the necessary downward revisions to reflect the impact of the weather in the region.
As you can see in the chart above, the USDA actually hiked its production numbers in both Argentina and Brazil as the year progressed. The agency started with forecasts of 57 MMT for Argentina soybean production and 97 MMT in Brazil.
By April, we were facing 59 MMT and 100 MMT, respectively.
Then, the drop came. It wasn’t until May that the agency made its initial cuts. We can see that the agency’s cuts in South American production and sharper downward tick on global stocks and U.S. carryout helped propel those contracts north of $11.50 in the following month.
However, we can see speculators start to pile in around March 2016. Prices pushed from the $8.80 range that month to north of $10.00 before the May report. Also supporting prices was some North American weather premium by June but the speculators kept riding bullish headlines until the longs were milked for all they were worth.
Where Does Argentina Take Us From Here?
Right now, many analysts are projecting that the USDA will continue to reduce its estimates for Argentina’s crop.
However, the last two cycles show that the agency has taken a conservative approach with their numbers. In addition, it is worth noting that speculation has been the primary driver of prices gains before the USDA makes its necessary revisions.
The USDA is currently sitting at 54 MMT.
Meanwhile, the Buenos Aires Grain Exchange just reported a slide to 44 MMT just last week.
It’s very unlikely that the USDA will make that level of revision.
Brennan has previously looked from a mathematical probability standpoint where the final Argentine soybean production number could land. He is suggesting that the number could end up somewhere between 45 – 46 MMT.
When he wrote that, he suggested that the market could climb anywhere from 75 cents to $1.25 / bushel before the bulls left the ring. We’re already up about 35 cents from that time of writing on February 21st.
That being said, the question is how the markets will react to any further potential cut.
There are really two scenarios from my vantage point.
The first is that the USDA makes a cautious cut as low as 50 MMT. While it likely would not reflect conditions on the ground, it would likely signal that the USDA is going to make further cuts in the future. A smaller cut, I believe, will propel even more speculation. It will propel more speculators to pile in on soybean prices and push them higher through the rest of the month of March.
The narrative in the market would continue to focus on Argentina and questions would abound about what the USDA is doing with its figures. A repeat of February’s steady, but a strong uptick in pricing could be repeated.
The less likely scenario is a very dramatic cut – something down to around 46 MMT.
That would be an 8 MMT cut in month-over-month, which isn’t unprecedented, but certainly isn’t common. I would expect that prices would go limit up on Thursday and surge well above $11.00
However, that may bring about the high-water mark.
Brazil’s harvest is delayed, but picking up, and we’ll start to get a better sense of how much soybean production to expect here in the United States over the next month.
Brazil is heading toward another potential record crop, and if not a record, the second-largest ever.
Thus, the markets would be euphoric for a few minutes (read days or possibly a week), before turning off the blinders to the bearish factors that are looming.
Prices are likely headed back to earth at some point this year. That is evident just looking at the futures board, where 2019 contracts are much lower. For example, November 2019 contracts for 2019/20 production is trading at $9.95.
The question is where the weather will push them in the months ahead. Remember that the secret to making a big profit is “sell on the rumor, profit on the fact.”
We’ve been having conversations with a lot of farmers who are increasingly happy with these prices and have already contracted on the July contract that is trading near $10.80.
Ultimately, we’re looking to get the most that we can out of our final 20% of old crop, and prices for new crop are very attractive at these levels, but we remain steadfast in our targets.