Todd's Take

Whether you refer to it as "free on board" or "freight on board," FOB grain values are a good way to compare the prices of grains loaded on ships and offered at various ports as the buyer agrees to bear the costs of transportation, insurance and unloading. In the case of soybeans, FOB prices in Brazil and the U.S. saw more bullish behavior this week, which left me scratching my head once again.

The FOB price for soybeans at the port of Paranagua, Brazil, finished Friday just shy of $11.00 per bushel, up a dime on the week and its highest close in over a year. Similarly, FOB soybeans at New Orleans, Louisiana, were up 15 cents on the week to $10.82 per bushel, their highest close in 11 months.

A simple glance at fundamental expectations tells us this shouldn't be happening. After all, Brazil is currently harvesting what is expected to be a 4.1-billion-bushel (112.0 million metric ton) crop, not far from last year's record harvest of 4.2 billion bushels (114.1 mmt).

Depending on what source we listen to, the soybean harvest is said to be roughly 20% to 25% complete, so we could wonder if the latest price rise is a short-term blip while ports wait for soybeans to arrive. However, typically, the anticipation of harvest is enough to keep a lid on prices as few want to buy in front of an approaching tsunami of supplies.

An 11-month high in the New Orleans price may be even more puzzling as U.S. shipments of soybeans are down 13% from a year ago. This season's shipments to China, the world's largest buyer of soybeans, are down 20% from a year ago.

Many will point to Argentina's ongoing drought as the reason for higher soybean prices, and that is certainly an important bullish factor. On Thursday, the Buenos Aires Grain Exchange reduced its estimate of Argentina's soybean crop from 50.0 mmt to 47.0 mmt (1.7 bb), well below USDA's latest estimate of 54.0 mmt (2.0 bb).

However, according to USDA, Argentina currently has 18.1 mmt (665 million bushels) of excess soybeans to draw upon as reserve for crushers to stay busy. It simply is difficult to see how Argentina's drought, by itself, explains new highs in FOB prices for either Brazil or the U.S.

Please understand I don't mean to frustrate readers unnecessarily, but I point these things out because valuable insights often hide in market clues that don't appear to make sense.

Time will eventually solve this riddle, but for now, the most plausible explanation seems to be that global soybean demand is stronger than expected, even as China has minimized its U.S. purchases and showed up in Friday's export sales report with a cancellation of 13.3 mb of U.S. soybeans.

As supporting evidence, it is worth noting that new-crop spreads in soybeans show a slight bullish inverse -- a bullish sign of commercial activity, which is even more apparent in new-crop soybean meal spreads. Yes, Argentina's drought has brought a bullish change in the dynamic for soybean prices early in 2018, but this week's FOB prices suggest there may be more to this bullish story than the fundamental narrative currently explains.

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

Follow Todd Hultman on Twitter @ToddHultman1

(AG/CZ)

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