Newsom on the Market

By Darin Newsom
DTN Senior Analyst

The 2016 Commodity Classic in New Orleans is creeping closer (March 3-5). When one says "New Orleans," a meal of delicious gumbo comes to mind and the mouth starts salivating. But questions are also raised. Is gumbo of Creole of Cajun descent? Is it a soup or a stew? Or is it just gumbo, the whole menu item taking on the characteristics of another definition of the word: "A fine, clayey soil that becomes sticky and impervious when wet."

When I think of Commodity Classic, particularly last year's, my mind goes back to soybeans. On that early February morning (the 28th, to be exact) in Phoenix I talked about the soybean market's long-term technical picture. How its monthly chart showed signs establishing a major uptrend, due in part to noncommercial traders covering their net-short futures position (according to weekly CFTC Commitments of Traders reports) and a long-term bullish commercial outlook.

Ah yes, the famed commercial outlook. In its February 2015 round of monthly supply and demand reports USDA pegged the 2014-2015 marketing year domestic ending stocks at 285 million bushels. This was down from January's 410 mb due to a 15 mb increase (from the Jan report) in crush demand and a 20 mb increase in export demand offsetting a 10 mb increase in imports. Using previous marketing years as precedence, USDA was expected to continue trimming its ending stocks figure through the September 30 Quarterly Stocks report. All of this was seemingly confirmed by the market's bullish forward curve (series of futures spreads) for both old-crop (2014-2015) and new-crop (2015-2016).

In other words, the market's structure looked long-term bullish. So much so that I projected new-crop soybeans could climb to almost $10.50. One attendee, a friend of mine, was so moved by the presentation he came up afterward and said, "If you keep talking like that, people will start calling you 'A Boy Named Sue.'"

This presentation was in direct contrast to my market outlook that I had presented almost three months earlier (early December 2014) at the annual DTN/The Progressive Farmer Ag Summit in Chicago. There I focused solely on USDA's fundamental numbers, and used early new-crop acreage and yield projections to come to the conclusion new-crop soybeans could fall to $6.00.

So what does all this background information have to do with soybeans now -- and with gumbo?

Just like gumbo is seen as Cajun, or Creole, a stew, or a soup, the argument can be made that soybeans can be seen as bullish (technically and fundamentally) and bearish (technically and fundamentally). Earlier this week I posted a Technically Speaking blog analyzing the market's long-term monthly chart. To me it resembles a waterfall, with the market going over the edge back in 2012, falling to a plateau and bouncing, going down again to the next level of calm and a bounce, before starting the continued descent down to a new low of $8.44 1/4 posted this past November. The question is has the market hit the pool at the bottom of the falls, or is this just another plateau?

USDA wants us to believe another set of falls is coming. With its January round of numbers scheduled for Tuesday the 12th, it would not be surprising to see USDA raise domestic, and possibly world, ending stocks again.

Or USDA might not, for much of December saw Mato Grosso struggle with adverse weather, the equivalent of an uncooperative month of June in North America. Also, as Elaine Kub pointed out in her latest "Kub's Den" column "Manufacturing a Case for Chinese Soybean Demand," it is possible U.S. export demand could be stronger than the 1.715 bb USDA projected in its December report.

And then there are those pesky futures spreads again. Just as last year's forward curve indicated USDA was overestimating supply and demand, this year's model again shows a neutral-to-bullish view of market fundamentals. How is that possible with USDA projecting 2014-2015 ending stocks of 465 mb? As I've written about before, using USDA's tendency toward overestimation of domestic soybean stocks, the September 30 quarterly stocks figure could come in closer to 180 mb. Sounds crazy, right? At the end of 2013-2014 USDA's September 30 (2014) stocks figure was 92 mb, or 31.2% of USDA's high monthly estimate for the marketing year of 295 mb (July 2013). At the end of September 2015 USDA calculated stocks on hand at 191 mb, or 40.2% of its high estimate for the marketing year of 475 mb (June 2014). USDA's 2015-2016 high ending stocks estimate was its initial set of numbers from last May sits at 500 mb. The average of the last two years suggests September 30 quarterly stocks would come in at 35.7% of this high.

So are soybeans bullish or bearish? Yes. Based on USDA projections and another expected increase in planted acres, the argument could once again be made for $6.00 soybeans. However, if the market's bullish forward curve is actually indicating USDA is once again overestimating domestic ending stocks, possibly leading to another round of noncommercial short-covering, the market could actually start to stabilize. As always, much will depend on how noncommercial traders play the market, and that depends a great deal on the U.S. dollar and the Brazilian real.

All of these ingredients make the soybean market a true gumbo: A sticky combination that can be viewed as a stew (bullish), a soup (bearish), or a little bit of both.

Pass the hot sauce and jalapeno cornbread.

Darin Newsom can be reached at darin.newsom@dtn.com

Follow him on Twitter @DarinNewsom

(CZ/SK)

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