Todd's Take

Soybeans' Bearish Collapse: Cash Prices and Meal Futures Falling

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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Since the highs made on May 12, DTN's National Soybean Index is down over $3 per bushel, and July soybean meal is down over $100 a short ton. Both are examples of how quickly demand for soybeans and meal vanished the past six weeks. (DTN ProphetX chart by Todd Hultman)

On Feb. 9, 2021, USDA lowered its estimate of U.S. ending soybean stocks from 140 million bushels (mb) to 120 mb, and it seemed like just a matter of time before the estimate would have to be lowered again. The U.S. soybean crush was running up 6% from a year ago, and there were already 2.184 billion bushels (bb) of soybean export sales on the books, not far from USDA's export estimate for the entire 2020-21 season.

From every perspective, the outlook for U.S. soybean prices was bullish, and it was difficult to know how high prices would have to climb to shut off demand.

Indeed, prices did go higher, and we witnessed another bullish surge, taking May soybeans from $13.82 on April 12 to a high of $16.77 1/4 on May 12. In that one-month span, commercials were so determined to secure supplies that May soybeans were pushed higher in 18 out of 22 trading sessions. Cash soybeans showed bids of $16 and higher throughout much of the Midwest. Some bids in Illinois and Indiana even topped $17.

On May 12, the day prices peaked, USDA estimated U.S. ending soybean stocks at 120 mb for the fourth consecutive month, and it looked as if the U.S. would have to import more than the 35 mb USDA estimated.

Then, something changed.

It is difficult to pinpoint what tipped the soybean market from bullish to bearish, and we won't find any news headlines proclaiming the top. Since May 12, the soybean market has not been the same, as if someone flipped a switch. In hindsight, we can say the last gasp of demand in early May must have allowed commercials to secure the supplies they needed to get through summer.

Nine days after DTN's National Soybean Index peaked at $16.47 per bushel on May 12, I talked about "Bearish Riddles in Soybean Futures" (see https://www.dtnpf.com/…).

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At the time, it wasn't clear the high was in, but there were several puzzling bearish clues that were difficult to explain. DTN's National Soybean Index had fallen $1.24 per bushel to $15.23 by May 20. It was a quick reversal, but not unusual for prices that high. More disturbing was the 17-cent drop in the cash basis that took place since the end of April. That was the first clue demand for physical soybeans had changed.

I also noted that July soybean meal fell $27.40 the day after the May 12 World Agricultural Supply and Demand Estimates (WASDE) report. It was the largest one-day drop on record for the July meal contract, and it proceeded to slide to a new one-month low of $401.10 by May 20.

On May 21, these were troubling clues for a market that looked so bullish just nine days earlier. Since then, the situation for old-crop soybean prices has turned even more bearish: The cash basis is now down 41 cents from the end of April. July soybean meal closed at $345.80 on Thursday, June 24, the lowest close since October, and DTN's National Soybean Index settled at $13.38 Thursday, down over $3 from the May 12 high.

The transformation from bullish to bearish has happened so quickly that USDA has not even been able to explain the change yet, other than to note a 15 mb decrease in the crush estimate on June 10. Given the rapid loss of demand, we shouldn't be surprised if the Grain Stocks report on June 30 shows more soybeans than we would expect for the current estimate of 135 mb in ending stocks at the end of August.

In the bigger picture, I'd like to mention a statistical tool that I often talk about in DTN's monthly WASDE webinars. The chart with this article compares the past 24 years of monthly cash soybean prices, adjusted for inflation, to USDA's estimated ending stocks-to-use ratios.

The chart shows a wide range of historical price possibilities when USDA's ending stocks-to-use ratios were 5% or less. Understandably, markets are often nervous and volatile when supplies get as tight as they have been the past several months.

While the $16.47 high of May 12 was well within the range of expectations for this tight of a market, the statistical center of past prices was roughly $13 per bushel, not far from Thursday's close of $13.38.

I mention this to point out that much of the selling that has occurred since May 12 could be described as a deflation of bullish enthusiasm without a significant change in actual fundamentals. Some of the selling was also related to a shrinking weather premium as a seven-day forecast finally formed this week to challenge the dry conditions that had been threatening early row crops.

The drop in meal prices appears to have been the result of overactive crush activity that tried to keep up with rising bean oil prices. It is important to note that soybean meal prices in China have not broken to new lows this year the way they have in the U.S. So far, I do not see signs of failing demand in China, and USDA's report Thursday of 387,600 metric tons of export sales last week is encouraging.

November soybeans closed at $12.91 3/4 Thursday, June 24, near their 100-day average and are struggling to hold above support. Depending on USDA's planting estimate on June 30, and the weather ahead, there is still a bullish case to be made for new-crop soybeans that shouldn't be discarded yet.

Last week, Chinese officials were trying to talk down grain prices. This week, we've seen three export sales announcements of new-crop soybeans to China. This is a confusing time for markets, and the drop in cash soybean prices is concerning. I'm glad to say DTN recommended its first new-crop sale of 25% of 2021 production on May 14 when November soybeans were above $14, but bullish possibilities for soybean prices still exist.

Join us for a noon CDT webinar on June 30 as we look at USDA's Acreage and June 1 Grain Stocks reports. We'll discuss what they mean for prices and try to answer any questions you have. Register at: https://ag.dtn.com/….

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

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

Follow him on Twitter @ToddHultman1

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Todd Hultman