Todd's Take

For grains in general, last week could have been a bearish train wreck. A 1,000-point drop in the Dow Jones Industrial Average on Monday, followed by another 1,000-point drop on Thursday, clearly rattled investors and sent several commodity prices lower. Crop prices, however, survived the week with small gains in the March contracts of corn, soybeans and winter wheat.

As one reader wrote (and probably spoke for many), "Why should grain prices fall just because stocks tumble?" After all, stocks went up for several months without influencing grains higher. It is true that there is no strong correlation between grain prices and the stock market, but as I often mention, markets are people and people are emotional. Stock futures may have been causing the losses in investors' futures accounts, but when losses get big enough, all kinds of futures positions can get tossed out, including grains.

The soy complex in particular had another reason to trade lower last week after USDA raised its estimate of U.S. ending stocks from 470 million bushels to 530 million on Thursday, the most in 11 years. In addition, USDA's estimate of Brazil's soybean crop increased from 110.0 million metric tons to 112.0 mmt (4.1 bb), virtually agreeing with an estimate of 111.6 mmt that Brazil's government put out earlier the same day.

As we now know, March soybean price did not crater after USDA's bearish report, but ended up 4 3/4 cents Thursday and was able to finish the week with a gain of 4 1/4 cents. Even more impressive, March soybean meal finished last week with a gain of $12.40 per short ton, and tacked on another $14.00 Monday, launching the contract to its highest spot close in over a year.

Meal's bullish performance in the midst of a hostile week of trading was no small matter and was a strong market clue that paved the way for Monday's new high. Fundamentally, last week's buying in meal was related to hot and dry conditions in Argentina that are expected to continue again this week.

On Thursday, USDA's WASDE report acknowledged some crop stress when it reduced the estimate of Argentina's soybean crop from 56.0 mmt to 54.0 mmt (1.98 bb). A short time later, the Buenos Aires Grain Exchange reported an even lower estimate of 50.0 mmt (1.84 bb) for Argentina.

If it sounds odd for meal prices to be so bullish at a time when Brazil, the world's largest soybean exporter, is starting to harvest another big crop, keep in mind that in spite of a stiff export tax, Argentina is the world's largest exporter of soybean meal. In Thursday's "Oilseeds: World Market and Trade Report," USDA expects Argentina to export 31.20 mmt or 47% of the world's soybean meal exports in 2017-18. However, if the current soybean crop shrinks much more, there could be room for increased U.S. business.

Here in the U.S., meal has already seen some encouragement as U.S. meal shipments are up 5% in 2017-18 from a year ago, while a lower shipment pace has been the rule for corn, soybeans and wheat. While China has cut back its purchases of U.S. soybeans in 2017-18, countries like Philippines, Canada and Colombia have kept up or increased their purchases of meal.

Thanks to this season's increased demand for meal, lofty crush incentives are making a case for a higher pace of U.S. soybean crush. Based on Monday's March futures prices, crushing one bushel of soybeans into meal and bean oil adds another 20.8% of value to the underlying soybean. That is the highest incentive for crushing soybeans since 2002 and should compensate for some of this season's loss of soybean exports.

Now that March meal has posted a new one-year high, the trend is clearly up. It is also impressive that last week's rally was largely propelled by commercial buying as the carry in the March/July meal spread narrowed from $6.70 last Monday to $2.70 this Monday -- a bullish sign that commercials are showing increased interest in securing the front month.

The new-crop meal spread of Dec 2018/Mar 2019 is even more bullish, now sporting a $2.20 premium in the December contract, which is another sign of bullish commercial behavior.

With so many market clues tilting bullish for soybean meal, we may be tempted to think higher prices are a lock, but there are risks. Much of the current scenario depends on Argentina's weather and harvest estimates that are still fluid. Brazil's big harvest still can't be ignored, and China continues to poke the U.S. on the issue of trade -- the latest act coming in the form of a cancelled purchase of 16.7 million bushels of U.S. soybeans.

Fundamentally, the landscape for soybeans is confusing with Brazil harvesting over 4 billion bushels of soybeans and U.S. soybean exports dragging. Technically, however, the trend in soybean meal is clearly up until proven otherwise.

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

Follow him on Twitter @ToddHultman1

(BE/CZ)

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