Todd's Take

It finally happened. After suffering through a long winter of bearish, sideways grain prices and hearing about another year of good growing weather in South America, something finally broke the mood and sent prices sharply higher last week.

I say "something" because even now, one week later, it is still not clear to what prices were reacting. Yes, corn prices received some support from hot and dry weather in Mato Grosso and much was made about lower soybean crop estimates in Argentina after heavy rains ruined harvest in certain areas. But neither of those two events were significant enough to explain the rally in grain prices that erupted in the third week of April.

There was also the news that Brazil's lower house voted to impeach President Dilma Rousseff on Apr. 18, but frankly, the influence of Brazil's political problems on soybean prices has always been suspect and came primarily from the impact of Brazil's rising real. The real actually calmed down after Monday's vote and traded steady to lower the rest of that week.

With no obvious news available to explain last week's bullishness in grains, we are left to sift through the market's own clues and, as usual, the market did not disappoint.

I have always been fascinated at how a fire investigator can go through the rubble of a torched home and know whether the fire started from an electrical short in the wall or a careless cigarette butt. Analyzing markets is not quite as complicated, but there was one important clue that you may not have heard about in last week's grain news -- a clue that explains much about last week's rally and raises doubts about this winter's bearish narrative in soybeans.

Early in April, it became clear the grain rally was being led by soybeans and that remained true last week. Corn prices had been rocked by USDA's bearish planting estimate of 93.6 million acres on Mar. 31 and were slowly trying to recover early in April. Wheat prices were drowning in bearish news and looked headed to new lows in April's first week. July soybeans, on the other hand, had been rising along with Brazil's real and were holding patiently below their six-month high of $9.35.

At the time it seemed like a fluke that soybean prices could trade so high on Brazil's political problems, but on April 11, July soybeans closed at a new six-month high and the race was on. As I used to say in the brokerage business, prices don't always come with explanations attached and this was one new high that couldn't be ignored.

Typically when fundamentals disagree with price behavior, you can give the market a little time and prices will fall back in line with the fundamental narrative. But when prices keep going higher the way they did on Apr. 11, you have to wonder if something more is happening that we in the public are not yet privy to.

It's still not clear what lit the fire under soybean prices, but a closer look at futures spreads tells us where the fire started. The initial spark came from commercial buying in new-crop soybean meal as the Dec/Mar meal spread closed at a new high on Apr. 12 and finished with the December contract priced above the March contract on Friday, Apr. 15. The new bullish inverse gave us the first market clue that demand for soybean meal was stronger than previously believed and the fact that it happened in meal first was a bullish shock as the U.S. had been losing export business to Argentina earlier in the 2015-16 season.

Futures spreads in new-crop soybeans followed with their own bullish inverse on Apr. 19, but when the week ended, the only inverse still intact was in new-crop meal. And what about old-crop soybeans? The July/November soybean spread actually shows that July soybeans finished April's third week with a bigger gain than the Nov. contract, but the bulk of July's advantage did not show up until Wednesday, Apr. 20 -- a speculative late-comer to the party.

The big questions now are: What is happening to cause this new surge of commercial interest in soybean meal and why is it directed at new-crop months? Until we get more information, I think it is fair to suspect increased demand from China, but in another sense, it may not matter.

As far as producers are concerned, soybean prices near their one-year highs, as they were last week, deserve some sort of protective action, whether that means cleaning out the bins, buying puts, or forward-contracting some new-crop production.

I cannot yet say that a new bull market has begun, but keep in mind the research that I mentioned in the Apr. 12 article, "How Will We Know?" History shows that a weekly close in spot soybeans above their one-year high is technically bullish even when we don't know all the reasons. As of Monday, the one-year high in spot soybeans stands at $10.60 1/4.

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

Follow him on Twitter @ToddHultman1

(SK/CZ)

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