Todd's Take

As I am writing this on Thursday evening, I am fully aware that it doesn't make much sense to discuss any short-term grain issues in front of Friday's Acreage and Grain Stocks reports from USDA. Those two reports have the potential to change the conversation with just one or two surprises.

Instead, I am turning my attention to a long-term chart of soybean prices, and the question of the night quickly becomes: just how low might soybean prices drop in 2018? At first, it's a guessing game, but it doesn't take long to come up with a couple of ways of looking at it.

My first idea is to go back and read the Todd's Take column from Jan. 30 where I projected highs and lows for the year, based on the relationships of historical prices to USDA's estimates of production costs. For soybean prices in 2018, I wrote:

"Based on a 20% and 80% premium to USDA's landless production costs for soybeans, the model projects a 2018 low of $7.49 a bushel in January soybeans and a high of $11.23." (https://www.dtnpf.com/…)

So far, January soybeans reached a high of $10.63 in late May; 60 cents shy of its projected high for 2018. Not reaching the high end is probably understandable in a year when the U.S. and China are locked in an escalating trade war.

On the low end, if we apply the current basis from the August contract to the January 2019 futures contract, the projected low of $7.49 a bushel in the January futures roughs out to $6.84 on DTN's soybean index, another $1.18 lower from where the index settled Thursday.

A more traditional way of projecting a low would be to look at USDA's ending stocks-to-use ratio for U.S. soybeans and see how it compares to past years. Whether we look at the current season's 12.0% of use or the new-crop estimate of 8.7%, both represent the highest ratios in 11 years.

Thursday's close of $8.02 in DTN's soybean index was the lowest in over nine years, and if we go back 11 years, the low drops to $7.13. Whenever we go back that far in time, it seems fair to index prices for inflation, but that doesn't seem to work well for grains as those darn yield increases make a big difference over time. For the record, if we did adjust the 11-year low of $7.13 for inflation, the current equivalent jumps to $8.64, a price that cash soybeans have already fallen below.

In the big picture, targets of $6.84 and $7.13 are not that far apart and give us a rough target area to consider. More practically speaking, we have to acknowledge that we would like to see more definitive signs that prices are bottoming -- signs that are not visible yet. Evidence of commercial buying would be at the top of the list, and frankly, it would be even more convincing if it happened at or near harvest time when supplies are easily available and lows are typically made.

At the same time, we have to acknowledge that this is no typical year for soybeans because of the U.S. trade issues with China and Mexico. The bottom line is that markets are people, and until we can find a way to entice potential buyers back into the soybean market, prices remain dangerously vulnerable to further declines.

Let's see what USDA has to say on Friday....

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

Follow him on Twitter @ToddHultman

(BE/BAS)

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