Todd's Take

From a daily perspective, November soybeans are up in September, but prices haven't done much the past two weeks. Given the flurry of rumors lately that China is about to make large purchases of soybeans, the flat price action has been disappointing.

At first, the news reports were based on "people familiar with the situation," which is what old-school journalists used to call a non-story. Today, however, it is common for media sources to cite unnamed sources and pretend the hearsay is news. (No wonder traders didn't respond much to those early reports.)

Thursday's news had a little more meat in it but still lacked detail. The Associated Press reported China's Ministry of Commerce said Chinese importers did make deals to buy "soybeans and pork of considerable scale." We don't know how much a "considerable scale" might be, but at least the source was identified.

Thus far in 2019, 449 million bushels (mb) of U.S. soybeans have either been purchased or already shipped, down 35% from a year ago, so there is plenty of room for China to pick up its pace without departing drastically from last year's purchases. A dry start to the planting season in Brazil may be one of the factors encouraging China to make more U.S. purchases early, especially if rain prospects don't improve in the next month.

However, it is difficult to get past all the ifs and maybes that a new season brings. USDA's 640 mb estimate of U.S. ending soybean stocks in 2019-20 is a significant reduction from the billion bushel carry of 2018-19 and is based on an assumption that U.S. soybean exports will be roughly the same in 2019-20 as the previous year. Unfortunately for soybean bulls, even 640 mb of ending stocks has bearish implications for current soybean prices.

Fundamentally speaking, the most bullish news soybean prices could hear would be some sort of trade resolution that would remove China's 25% tariff. The next high-level trade meeting is set for Oct. 10 and, while the U.S. and China seem far apart, we can't rule out the possibility of a deal being struck someday.

Granted, I'm not especially optimistic yet, and I don't have any special access to trade negotiations or keen political insight. Actually, it is the technical perspective of soybean prices that has me wondering about soybeans' bullish potential.

More specifically, a look at the monthly chart of spot soybean futures shows a market that has been chopping lower for seven years, a long time to turn speculators bearish. Noncommercial net shorts hit a new record high of 123,395 on May 14 of this year, coinciding with the spot low of $7.80 1/2 a bushel, one of the lowest soybean prices of the past 12 years.

The other interesting thing is that spot prices have only been able to trade as low as $8.37 1/4 since May, a sign of firmer support that is accompanied by upward turns in the weekly and monthly stochastic indicators. The implication of these technical clues is that long-term downward momentum in soybean prices is subsiding.

Ideally, it would be easier to make a bullish case for soybean prices if the fundamental assessments of supply and demand agreed, but that is where the analysis gets confusing. We can say that prices reached a historically cheap level and market sentiment became excessively bearish, but we cannot yet say that the market is free to correct the bearish imbalance.

Unfortunately, the fundamental assessment is being held hostage by a political decision that is out of all of our hands. Assigning odds to the chances for a trade agreement between the U.S. and China that erases China's tariff is a difficult call -- last winter I gave it a 40% chance.

Almost one year later, I am now willing to give a trade deal a 50% chance, but I'm also concerned that with an election looming, time is on China's side to wait. It is difficult to ignore the bullish technical aspects of soybeans' long-term chart, but until there is reasonable hope for improvement in U.S. soybean demand, it is best not get too bullish on this market, at least not yet.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman

(BE/BAS)

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