Todd's Take

Soybeans Turn Up the Confusion

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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Ever since it became clear that Brazil was having its sixth-consecutive year of good growing weather, the popular outlook for soybean prices has been bearish. Recent new highs in FOB soybean prices however, suggest something more bullish happening (Source: DTN ProphetX).

The previous two Todd's Takes, "Soybeans Remarkably Defiant" and "Soybean Meal Breaks New Highs" should have covered the soy topic fairly well for now, and I apologize for taking it on once again, but darn it, the perplexing riddle took another interesting twist this week and deserves a closer look.

The fundamental narrative for soybeans should sound familiar by now. A sixth-consecutive season of good growing weather and plentiful rains has USDA estimating Brazil's soybean crop at 112.0 million metric tons (mmt) (4.1 billion bushels), more than enough to offer the U.S. a spring and summer of stiff export competition.

While Brazil's big crop was being anticipated, soybean prices broke to new lows in December and looked headed toward a long, downward descent until Argentina came along and captured traders' attention with a stretch of dry weather that hasn't gone away yet. Early in 2018, it was difficult to take the threat in Argentina's crops seriously, believing Brazil, the world's largest soybean exporter, had plenty on the way.

More recently, the dry and bullish La Nina influence persevered to the point that last Wednesday's report from the Buenos Aires Grain Exchange estimated 56% of soybean crops in Argentina were rated either poor or very poor. As Argentina is the world's largest exporter of soybean meal, it was easy to recognize the argument for U.S. meal prices trading higher, but the case for higher soybean prices was not as clear, muddied by Brazil's big crop and China's avoidance of making U.S. purchases.

Just as I was wondering if March soybeans were getting ready for a Saint Valentine's Day massacre, trading near their highest prices in over six months, Argentina's crop ratings mentioned above were released and another unexpected bullish clue emerged. FOB soybean prices in New Orleans broke above their January high and, as of Monday, the New Orleans' price reached $10.70 a bushel, its highest in 11 months.

To understand the significance of a new high in New Orleans' FOB soybean price, keep in mind that this particular price is most sensitive to foreign demand. Futures prices reflect a mix of commercial and speculative activity, DTN's National Soybean Index reflects a domestic perspective of cash prices across the Midwest, and New Orleans' port price gives us insight about demand for soybeans abroad.

When we compare the DTN National Soybean Index to New Orleans' FOB price, we get an interesting comparison of domestic versus foreign attitudes. Given Argentina's dry weather and last week's poor crop rating, it would be reasonable to expect higher domestic cash soybean prices, influenced by speculative buying on the futures board. In fact, DTN's index ended at $9.52 a bushel Friday, up 38 cents on the week.

Because of Brazil's big crop, one would not expect to see a new high in FOB soybean prices at New Orleans, yet that is just what happened with Monday's new 11-month high of $10.70. Even Brazil's FOB price in Paranagua was trading at the equivalent of $10.87 a bushel on Monday, also near its 11-month high.

So on one hand, we have Brazil's big harvest underway and U.S. soybean exports doing poorly. Yet, we also see FOB soybean prices keeping pace with increased speculative buying on the futures board, willing to make significant new highs. These new highs strike the core of the bearish argument for soybeans.

The plainest way to put this is that either soybeans' popular bearish outlook, based largely on estimates from the U.S. and Brazilian governments, is flawed and not as bearish as it appears, or the latest run-up in various soybean prices are temporary blips that won't stand the test of time.

If we are asking the question, "What should U.S. soybean producers do?" strong consideration has to be given to making early cash sales at this week's higher prices for at least part of 2018 production.

If the question is, "What are soybean prices going to do?" the only significant market clue supporting the popular bearish fundamental outlook is the generous level of carry in old-crop futures spreads.

On the other hand, commercial net-longs plus soybean prices themselves, including an unexpected appearance of new highs in New Orleans overwhelmingly suggest stronger-than-expected demand and higher soybean prices ahead.

This market has come a long way from January's early bearishness and there are apt to be more unexpected turns ahead. I understand if this sounds crazy with a big crop on the way from Brazil and a possible record U.S. soybean planting coming this spring, but market clues for soybean prices currently lean bullish.

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Todd Hultman