The Most Bullish Thing About Soybean Prices… Isn’t China

Sherwin Nuland is a man I greatly miss.

He was a physician, professor, and writer who taught medicine at Yale. He wrote one of the best books in history on the human condition, one that was snubbed out of a Pulitzer Prize.

I always enjoyed a quote of his about the medical profession.

“To become comfortable with uncertainty is one of the primary goals in the training of a physician,” he said.

The same goes for anyone who is a part of agricultural markets.

Change and uncertainty can be painful.

Trends you expected to remain constant turn upside down.

Prices change.

Numbers change.

And human bias can lead to big swings that are sometimes rational… and more often irrational.

That’s why I want to talk about short-term uncertainty in the soybean sector today…

And how we can capitalize on the uncertainty in the market, and the recent price swings.

What A Difference a Month Makes

Next Friday, on November 10th, it’s fair to assume that farmers will spend their day griping about the USDA’s release of the November WASDE report (It comes out the day before).

Most analysts anticipated the same behavior last month in October’s WASDE report. But the USDA came out of nowhere and slashed yield expectations. The November contract popped above $10.00 the day after the report. But prices quickly retreated toward the end of the October calendar.

The downturn didn’t come because of the factors that most people in the markets expected..

Markets have been focusing on one major bullish factor and one major bearish factor over the last few months.

The bullish factor has been the rising demand for soybeans from China. In July, markets were cheering the news that the Chinese were buying $5 billion in U.S. soybeans for the 2017/2018 year. [1]

The bearish factors are the size of the 2016/17 Brazilian crop, how much is still unsold by American and Brazilian farmers, and the size of the 2017/18 American soybean crop.

Last year, Brazil’s soybean crop hit a record high. Local prices collapsed. And farmers around the globe were highly concerned about news that Brazil would set another record in 2017/18.

Perhaps that is why one of my favorite titles about Brazil’s crop was from Reuters.

“Brazil farmers ‘hope for a miracle,’ hoard soybeans.” [2]

The miracle is that they hoped that prices would dramatically rise. The paradox here is that more supply in storage is a bearish factor and would negatively affect prices. Further, soybean acreage in Brazil would rise again in 2017/18.

With these factors playing off each other, it looked as though prices would struggle to approach that $10.00 ahead of the October WASDE report and in the ensuing weeks.

But the paradigm has changed. And it’s created one of those blips that we discussed two weeks ago about how to play the soybean market.

Now, farmers are looking for the next price pop.

Chinese Soybean Demand Growth Slowing?

What a difference a few weeks can make.

At the start of the month, U.S. exports to China were facing delays due to Hurricanes along the Gulf Coast. If that wasn’t bad enough, we saw the mother of all bearish news from China on October 23.

Prices in China on the Dalian Commodity Exchange fell on Oct 23 to their lowest levels in 18 months on news that the country was on the verge of suspending state purchases from their own farmers. The news came at a time that farmers reported the largest domestic crop in six years.

The country’s output was expected to hit 14.4 million tonnes as forecasted by both CNGOIC and the USDA’s attaché in Beijing. That figure is an 11% above last year’s crop.

The attaché says that the increase in production is a combination of favorable weather and acreage expanding by about 10% to 19.5 million acres. The Chinese Ministry of Agriculture says the increase is even greater, with their countrymen and women planting 20.2 million acres of soybeans in 2017/18.

The reason for the increase was the government stopped subsidizing corn production, so farmers intuitively planted less corn.

Nowhere is this more impactful than in China’s top-producing state, Heilongjiang. As Brennan mentioned in the Breakfast Brief on October 18, farmers are getting paid about $20 for every 1/6th of an acre they plant to corn (or a $120 / acre).

This is 13% lower than what was offered by the Chinese government in 2016/17. It’s also 30% less than what a Heilongjiang farmer gets paid by the government for planting soybeans.

As such, Heilongjiang soybean acreage was forecasted to be 34% higher in 2017/18 at 8.6 million acres.

On the flipside, the USDA’s attaché in Beijing says that China will import nearly 100 million tonnes of oilseeds in 2017/18. Soybeans are expected to own 95 million tonnes of this, which is up 1.5 million from 2016/17.

But the attache says that soybean imports are starting to level off. Why?

Three reasons:

1. Slowing demand growth of for soymeal (the main reason China imports so many soybeans)
2. Relatively high carryover in stocks from 2016/17; and
3. (as mentioned) higher domestic production of soybeans.

In 2016/17, soybean imports in China grew by 10 million tonnes over the previous year to 93.5 million tonnes. That’s the second-largest one-year jump in China’s soybean importing history.

The main reason for the slower growth of imports in 2017/18 is that there’s already sufficient inventories available in China.

Soybean stocks in China by the end of 2017/18 are expected to climb above 20 million tonnes. That’s a 20% jump year-over-year. It’s estimated that the Chinese government is holding about 4.1 million tonnes in reserve today. That’s down from 4.4 million tonnes held about four months ago (the reason for the decline in state reserve auctions taking place).

One last factor to consider is that food-grade consumption of soybeans in China is expected to account for 12 million tonnes in 2017/18.

However, the bottom line is that Chinese soybean import demand is slowing.

Brazil’s Planting Problems

Soybean planting in 2017 in Brazil started slow. There have not been the normal rains, and those who have tried planting into dust have had to reseed – the germination isn’t something to be toyed around with.

As Brennan mentioned in a Breakfast Brief last week though, there are rains in the forecast. If these rains were to fall, total August-to-November precipitation would be closer to the average.

Today, soybean acres planted are still behind the 5-year average, but not by as much as it was in the previous weeks.

In early October, we suggested that this year’s soybean crop in Brazil is looking closer to that grown in 2015/16. That year, production estimates easily topped 100 million tonnes but when the fat lady sang, combines only took off 96. 5 million tonnes.

Regardless of what Mother Nature has in store, this delay in the planting season is likely to create a bit of a supply issue in February 2018, when the crop is scheduled to be harvested. In fact, we could see the Brazilian harvest pushing into March 2018.

How Soybean Farmers Can Play This News

We’re always looking for short-term factors that can allow farmers to take advantage in small price pops. In the last two weeks, we’ve seen this happen with the November futures contract. Right after the WASDE report, aggressive buying pushed the contract above $10.00.

Earlier this week, a sudden – and almost spontaneous – blip pushed soybean prices back near that double-digit threshold, despite no significant news. Ahead of next week’s WASDE report, we’re going to need to dig into analyst reports and look for a contrarian way to play this upcoming announcement.

We’re seeing more and more analysts pushing higher yield expectations ahead of the report.

“But what about further out Garrett? Like the next 6-9 months?”

When we look out into the future, we must use history as a measuring stick.

In spring 2016, we saw soybean prices on the Chicago Board of Trade climb from the lows of below $9 in early March to highs above $12/bushel by the middle of June.

There were three main catalysts for this price rise:

1. The smaller harvest in Brazil;
2. A delayed harvest in Argentina (which turned out to be more noise than anything); and
3. Weather premium for the 2016 North American crop that was getting seeded.

As mentioned, Mother Nature holds a lot of the cards right now for the Brazilian soybean crop. Currently, the USDA is forecasting a 107-million-tonne crop for Brazil in 2017/18.

Things are wet in Argentina again, but this is impacting corn and wheat acres and production. The soybean seeding season is just getting started in a few of the areas.

Estimates for North American soybean acres in 2018 are quite varied, ranging from 86 million to 91 million acres. 2017’s acreage was 88.5 million acres.

One could argue that China’s insatiable desire for soybeans in 2016/17 also helped prices. However, the reason we saw soybean prices climb more than $2/bushel was because of these three factors above.

Uncertainty Equals Opportunity

This all brings us back to uncertainty.

With the North American harvest pretty much finished, the eyes of the soybean market are turning south of the equator.

Now, I’ve previously written how the most bearish thing about soybeans is South America.

However, because of the uncertainty of what the 2017/18 growing season for the region holds, it’s also easily categorized as the most bullish.

However, we do not think those bullish opportunities will last.

Simply put, the market will start gravitating to any little headline that suggests a production shock in Brazil and Argentina. Currently, those headlines are dryness and delayed seeding in Brazil and wet weather in Argentina.

This is what we call noise.

Why do we do this?

No one knows for certain that the conditions won’t yield a decent crop.

Heck, we saw pretty tough growing conditions in North America this year yet a record crop was grown: 120.5 million tonnes in the US and 8.3 million tonnes in Canada.

Conclusion: it’s certain that the uncertainty of the Brazilian and Argentinian growing season will add a premium to the market.

How much exactly is definitely an unknown and playing that game is like picking one number on the roulette board?

However, as we climb off the harvest lows, these opportunities are likely to be seen in mid-November to mid-December and possibly again in late February / early March. There may be others, but those are the timeframes we’re going to watch.

As such, quote me: “To become comfortable with uncertainty is one of the primary challenges of being a farmer.”

On that note, keep your eye out for some more tools over the next few months that will help you price your soybeans and any other grain with more conviction than ever before.

About the Author
Garrett Baldwin

Garrett Baldwin is a content strategist and editor at FarmLead. He covers the global grain markets and public policy issues related to the agricultural industry. He is a graduate of the Medill School of Journalism at Northwestern University. He also holds a Master’s Degree in Economic Policy from The Johns Hopkins University, an MS in Agricultural Economics from Purdue University, and an MBA in Finance from Indiana University.

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