Kub's Den

How Cheap Is Cheap?

Elaine Kub
By  Elaine Kub , Contributing Analyst
Inflation has been mild -- but not zero -- during recent years, and it has affected the real value of a bushel of soybeans. (Chart by Elaine Kub using data from DTN ProphetX and the Bureau of Labor Statistics)

"Nine Year Low," are what the headlines are saying about soybeans. And it was an almost uninterrupted freefall that got us here, starting with the month of March, when the front-month soybean futures chart topped out at $10.71 per bushel. It drifted lower for a while, but ever since Memorial Day the August soybean contract seemed to be hurtling toward earth at terminal velocity, losing an average of 7 cents per session over 33 trading sessions.

The old-crop soybean market has finally shed a full 25% off the March highs. Those highs were established back when producers and end users were looking forward to a world with eager global oilseed demand, and back when they assumed the world's two largest economies would effectively negotiate their trade concerns without dragging soybeans into the fray. Further losses may certainly be justified as time goes on, especially for the new-crop November soybean contract, which is only down 20% in that timeframe. It may also need to reflect bearish 2018 production potential if Midwestern U.S. weather remains favorable through July and August.

But I don't think the 25% fall is just a coincidence.

The Chinese tariff now in place for imported U.S. soybeans is set at -- that's right -- 25%.

It always rains after a dry spell and commodity prices always go up after a fall. There is always going to be some moment when the market's traders decide the chart has fallen sufficiently low, and there is always some price below which no one is willing to sell. The soybean meal market has demonstrated this over the past month. Even while the broader oilseed market has been wringing its hands about trade bearishness, meal traders were confident about robust domestic feed demand. There has been almost no one willing to sell nearby soybean meal futures below $328 per ton.

So, while additional bearishness may still come filtering in to the soybean market, for now there appears to be buying interest, and a moment to pause and reflect.

How bad are those nine-year lows, really? A cash soybean price tag that's $2.40 per bushel lower now than it was in March isn't great news for producers, of course. It's a vivid illustration of how much value they have at risk at any time. However, a significant portion of the 2017 crop of U.S. soybeans was likely already sold at better prices and much of the 2018 crop of U.S. soybeans may have a revenue-based crop insurance product as a financial backstop. Only if this grim trade scenario persists throughout a full marketing season will it entirely shift farm income levels.

On the other hand, these lows don't feel like nine-year lows at all when one considers how different the world was nine years ago, or 18 years ago, or 36 years ago, or more. The most recent low on the continuous soybean futures chart, $8.10 1/2, is a nominal price tag that we haven't seen since December 2008, when the entire world economy was in financial crisis and the soybean chart hit a low of $7.76. But $7.76 in December 2008 had the same buying power as $9.30 in the summer of 2018. So the $8-plus price of soybeans today definitely feels worse, in terms of the value of those dollars, than the prices received even during the nadir of the 2008 global recession.

How far back would we really have to go to find a comparable low? I collected the monthly closes of the front-month soybean futures contract and adjusted them all to reflect inflation since the year 2000 (which was an arbitrary choice, but also a pretty normal year for soybean trade. I didn't want to make everything really depressing by comparing current inflation-adjusted prices to the wild times of the 1970s).

Receiving $8.40 per bushel for soybeans today feels like receiving $5.62 per bushel in 2000. (That would have been nice, at the time! The market's low in August 2000 was actually $4.33 1/2.) The most recent time that the inflation-adjusted price of soybean futures matched today's level was during harvest in 2006, when the apples-to-apples Year-2000-inflation-adjusted price of soybean futures would have been $5.27. The actual price tag in October 2006 was $6.30 per bushel. So we may have hit a nine-year low on the chart, but it feels like an 11 1/2-year low in our hearts.

Inflation, as measured by the Consumer Price Index for All Urban Consumers (the Bureau of Labor Statistic's CPI-U for all items, including food items and energy costs), is basically a measure of how the purchasing power of a dollar changes over time. As the prices of audio equipment, pet food or eyeglasses increase from one month to the next, it takes relatively more dollars to buy those items. It's generally good for the economy when prices rise (preferably slowly and steadily) over time, because that means the economy is active, dollars are churning through hands and investing in businesses makes sense.

But if you're the one producing the stuff and receiving the price listed on the price tag, you need the price tag of your product to climb higher at the same rate as the price rises in all the other items you yourself need to buy. Soybean farmers, who are seeing real inflation-adjusted soybean prices lower than at any time in the past 11 1/2 years, must buy gasoline, audio equipment, pet food, eyeglasses with today's U.S. dollars. Not mentioning the need to buy diesel, farm machinery, grain bins and tires.

But really, inflation hasn't been too bad in recent years. Here's one way to look at it: In the year 2006, a brand new GMC Sierra 1500 SLE Extended Cab pickup had a manufacturer's suggested retail price of $30,855. In October 2006, the nominal price of soybeans was $6.30 per bushel. It would have taken 4,879 bushels of soybeans to buy that truck. That same value today, adjusted for inflation, would be $38,529, which is conveniently pretty close to the price tag for a 2019 GMC pickup. Paying for a pickup today with today's $8.40 soybeans would require only 4,500 bushels of soybeans and farmers tend to get more soybeans per acre now than ever before.

It's the threat of future inflation that should really keep the agriculture industry worried, particularly if it pulls input costs higher during a timeframe when product prices (grain prices) are depressed by artificial economic challenges (that is to say a trade war). It all depends on how long this exceptionally low price environment lasts.

Speaking of exceptionally low prices, a quick look at the futures board shows traders currently have soybeans priced under $9.00 per bushel all the way through 2018, all the way through 2019 and all the way up to summer 2020. We might expect something -- anything -- to change and pull prices back up eventually before we actually reach the summer of 2020. But in the meantime, are these historic lows perhaps historically magnificent opportunities for end users to lock in prices?

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.


Elaine Kub