Todd's Take

Out of the three major crop choices of corn, soybeans and wheat, soybeans continue to be the one with the most uncertain price outlook, sporting a narrow margin for trading either direction. Once again, in 2017 we saw a record soybean crop in Brazil, followed by a record soybean crop in the U.S.

Typically, five consecutive years of big crops from the world's top two producers would be enough to send spot soybean prices lower, perhaps near $8 a bushel. Instead, we see spot prices in the upper $9s, holding within a broad sideways range.

Of course, top credit for price buoyancy in soybeans has to go to the aggressive growth of world demand, especially from China. If USDA's estimates for 2017-18 are close, world soybean demand in 2017-18 will have increased 25% the past four years, while world production gained 22%. Over the same four years, China's soybean imports have increased 38%.

It may seem odd to hear that world soybean demand has actually grown more than production the past four years, because crop estimates and harvest totals get lots of bearish attention, while demand is often invisible early and recognized late.

Here in early 2018, soybean prices are getting the same asymmetrical treatment as USDA estimates Brazil is about to harvest a 4.04 billion bushel (110.0 million metric ton) soybean crop. USDA may bump the estimate a little higher in Thursday's WASDE report, but it will probably stay below last year's record 4.19 bb (114.1 mmt).

As usual, estimating soybean demand in early 2018 is no easy task, and so far, the early clues are bearish. Export shipments of U.S. soybeans are down 14% in 2017-18 from a year ago, and Thursday's report showed only 13.2 million bushels of export sales the previous week, a new marketing year low for soybeans. With Brazil expecting another big harvest, it is difficult to expect U.S. export business getting any better.

In an odd twist, the same USDA report on Thursday that showed poor export sales for soybeans also showed new marketing year highs of export sales for soybean meal and oil. While China has shied away from buying U.S. soybeans this season, shipments of meal are up 6% in 2017-18, thanks to increased business from Mexico, Philippines, Canada and Colombia.

Based on March futures prices, the incentive for crushing U.S. soybeans into meal and oil is at its highest level since 2006. Thanks to those higher returns, we should see a higher crush pace in the months ahead, which will make up for some of soybeans' lost exports.

When it comes to weighing market clues, soybeans have been a mixed bag for the past five months. Friday's CFTC data showed commercials cut back net longs, from 67,090 to 12,799 as prices briefly traded above $10.00 on Jan. 30, but the fact commercials are still net long is one vote of confidence for soybean prices holding firm.

On the other hand, futures spreads show no sign of commercials bidding up front-month prices, so it is difficult to see much bullish potential in the current concerns about Argentina's dry weather. That could change in time, but another bearish clue emerged Friday when the weekly chart of spot soybean prices posted a bearish outside reversal.

Soybean prices themselves are often the best clues of future behavior, but on a weekly chart, it is difficult to see more than a choppy, sideways range that has been reluctant to trade above $10.00 since summer. A closer look at the daily chart shows a new three-month low on Dec. 18, followed by a lower high on Jan. 30 -- the possible start of a new downtrend just as Brazil's next harvest is getting underway.

Overall, the current outlook leans bearish while traders wait to learn more about Argentina's next crop. Technically, a challenge of long-term support at $9.00 may be the most interesting contest we see this year as soybean prices have been remarkably defiant in the face of several big crops. Looking ahead, the question hangs in the air: could soybean prices withstand another big U.S. harvest in 2018?

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

Follow Todd Hultman on Twitter @ToddHultman1

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