Todd's Take

As we crank out the final few weeks of 2016, you might think that U.S. soybean producers would be smiling this year after achieving a record national yield of 52.5 bushels an acre and watching spot futures prices increase 19% from the end of 2015. Compared to a 2% drop in spot corn and 15% drop in Chicago wheat, soybean prices have been the ag sector's one small piece of bullish news in 2016.

But even this modest success comes with a price as producers are already feeling stressed about 2017. Should they take advantage of these higher prices and forward contract 2017 production now or wait for the possibility of an even higher price later?

The answer is not easy. And, as we found out in the newsroom last week, some feel strongly that DTN's commentary has been too bullish while others believe it has been too bearish. Concerned that the soybean market is suffering from its own version of fake news outside DTN, I thought this would be a good time to lay out the facts as best as we know them heading into 2017.

I usually don't look at value ranges for grains until after USDA releases its January estimates, but here's an early peek at 2017. For soybeans, USDA is estimating an average production cost of $474.15 an acre in 2016, or $313.52 if you leave off land expense.

Based on soybeans' historical tendency to trade between a 20% and 80% premium to their landless cost, the expected price range for January 2018 soybeans in 2017 is $7.16 to $10.75 a bushel. As of Friday, January 2018 soybeans were $10.26 1/4 bu, roughly 50 cents from the upper end of their expected range in 2017. Based on that alone, one could already make a good argument for taking some form of price protection on the 2017 crop.

Assessing soybeans' fundamental environment is where things get more complicated. Right or wrong, USDA's latest take is that the U.S. just harvested a record-high 4.36 billion bushels of soybeans and will have 480 million bushels left over at the end of 2016-17.

The U.S. ending stocks-to-use ratio of 11.7% is the most in 10 years, but is not etched in stone yet. As we have written about frequently, USDA has underestimated soybean demand over the past 25 years, and this time is probably no different. For the sake of argument, let's just say that soybean demand in 2016-17 remains one of the big unknowns.

At the heart of soybeans' uncertainty is China. So far, China's appetite has been voracious, and this year, the U.S. received more business than usual after Brazil's supplies ran low earlier than usual. In 2016-17, USDA expects U.S. soybean exports to increase 6% to a record-high 2.05 bb. So far this season, U.S. soybeans actually shipped are up 24% from this time a year ago with 76% of those going to China.

The usual pattern is that U.S. soybean exports start to decline in February when Brazil's newly harvested exports start to pick up. That brings us to the next topic: Brazil's soybean crop.

The U.S. and Brazil are expected to account for 82% of the world's soybean exports in 2016-17. USDA currently estimates Brazil's next soybean crop at 3.75 bb, or 102.0 mmt, and so far, crop conditions have been favorable. Of course, weather can change and January is generally regarded as the critical month for Brazil's soybeans.

As I found out last week, some are under the impression that world soybean supplies are plentiful -- "the second-highest world stocks on record" I was told. That is not accurate, and I blame USDA for the confusion. What USDA calls "ending stocks" in WASDE reports are actually a combination of ending stocks estimates for Northern Hemisphere countries and midseason stocks estimates for Southern Hemisphere countries. The result is that world supplies are made to look bigger than they actually are.

As bearish as Brazil's 3.75 bb crop sounds, the soybeans are needed. USDA estimates Brazil will have just 166 mb of soybeans left over when the current season ends in January 2017. If Brazil does have a 3.75 bb harvest in the spring, Brazil's ending soybean stocks are expected to fall to 131 mb in the new season. It is this chronic lack of soybean supplies in Brazil that is keeping bullish hopes alive. If it weren't for Brazil's tight supplies, the price outlook would be comfortably more bearish.

As things currently stand, much is riding on Brazil's weather, especially in the month of January. Continued good weather and a big harvest are apt to push U.S. prices lower at a time when traders will also be anticipating increased soybean plantings in the U.S.

Should Brazil's production stumble, however, Brazil's loss will translate directly to more business for the U.S. and higher soybean prices. The wide range of possibilities makes the guessing game difficult, and judging from our correspondence last week, producers are feeling the tension. And we haven't even talked yet about how President-elect Donald Trump's new policies might affect trade with China.

With so much uncertainty on the table, there are plenty of reasons to consider some form of price protection. But, it's not really helpful to argue bullish or bearish at this point -- market opinions don't erase uncertainty.

What does help is giving our customers accurate information so they can understand the risks they're facing and consider the options. That also includes pointing out the things that nobody yet knows. It can be frustrating, but assessing next year's soybean market in December is no easy task and the range of possibilities is still wide.

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

Follow Todd Hultman on Twitter @ToddHultman1

(AG/BAS)

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