Todd's Take

For Soybeans, Timing Is Everything

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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The new-crop Nov/Mar soybean futures spread shows a small carry of 1 1/2 cents, reflecting early concerns among commercials about soybean supplies at harvest time. October to January is also the time of year when China will be most dependent on the U.S. for soybean imports. (DTN Chart)

Shortly after Christmas of 2016, I wrote a column, "Soybeans' Gathering Storm," which anticipated what might happen if newly elected President Donald Trump followed up on his campaign promises to get tough with China on trade (…). It took another year for trade tensions to build, but it seems clear that the gloves are off now after China's Ministry of Commerce released its own list of proposed tariffs on 128 U.S. goods. China explained the list as a calculated response to President Trump's tariffs on steel and aluminum.

Back in 2016, Todd's Take explained China needed roughly 2.0 billion bushels (bb) of more imports in the 2016-17 season and, if South American crops came through (which they did), China could possibly squeak by from February to August without buying any soybeans from the U.S. One year and a few months later, it's difficult to say how much of USDA's estimated 3.6 bb of soybean imports China still needs in 2017-18, but it should be close to 2.0 bb again with just over five months left in the current season.

Late Thursday, the Buenos Aires Grain Exchange dropped its estimate of Argentina's soybean crop from 42.0 million metric tons to 39.5 mmt (1.45 bb), due to ongoing drought. Argentina won't be able to contribute much to China's needs in the year ahead, maybe 150 million bushels (mb) with another 150-to-200 mb each, from Paraguay and Canada. Keep in mind that China is the world's largest soybean buyer, but it is not the world's only buyer, meaning they may have to bid up to secure these supplies.

That leaves Brazil as China's great import hope in 2017-18 and -- lucky for China -- Brazil had a good growing year. On Friday, Dow Jones reported Brazil's soybean harvest was 65% finished and some private sources are expecting a new record, above last year's 114.1 mmt, while USDA is estimating this year's crop at 113.0 mmt or 4.2 bb.

Whatever the final tally is, it is likely that Brazil will be able to quench China's appetite for soybeans through September without much need for the U.S. After September, however, the tables turn as South American supplies dwindle. From October through January, China relies primarily on the U.S. for soybeans and that may be why China did not include soybeans in Friday's list of proposed tariffs. Understandably, China urged the U.S. to resolve these conflicts through dialogue (…).

Looking at the soybean market, we have seen old-crop soybean prices sag since early March, putting bullish noncommercial traders under pressure as talk of trade wars increased. New-crop, November soybean prices, however, have held firmer, finishing at $10.25 1/2 on Monday and not far from its highest November price in over a year. Perhaps the most bullish market clue is the small, 1 1/2 cent carry in the Nov/Mar futures spread -- a small amount that reflects early commercial concerns about new-crop soybean supplies.

Fundamentally speaking, USDA's Grain Stocks and Prospective Plantings reports on March 29 are apt to look bearish because the current pace of soybean exports has been slow and soybean plantings could come in above last year's record-high 90.1 million acres. After Argentina's drought, it is no exaggeration to say that a lot will be riding on U.S. weather this summer, and so far soil moisture is generally favorable across the Midwest.

Who knows how this growing escalation of tariffs will end, but it seems fair to say that stock market investors don't like it considering the Dow Jones Industrial Average was down over 3,000 points from its January peak before finding a rally on Monday. Pressured by Brazil's big harvest, U.S. soybean exports are likely to drag through summer, which means USDA's estimate of U.S. ending soybean stocks could still go higher in 2017-18.

As the year progresses, two factors to watch will be weather and the Nov/Mar soybean futures spread. Thanks to Brazil's success in early 2018, China has been able to skate by with lower purchases from the U.S., but they can't avoid the U.S. completely. Short-term, the October-January window is keeping China open to trade talks with the U.S. Longer-term, this trade war is giving Brazil more incentive and opportunity to expand soybean acres.

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Todd Hultman