Todd's Take

A Soybean Nightmare Revisited

Under the premise of no trade agreement with China before this fall, U.S. ending soybean stocks surpass 1.0 billion bushels and a stocks-to-use ratio of roughly 26% to a cash soybean price below $6.00 a bushel -- not a pleasant thought for U.S. soybean producers. (DTN chart by Todd Hultman)

You may find this hard to believe, but being DTN's Lead Market Analyst is not all glamour and parties. Having started in the commodity business in 1985, I have experience at how bad things can get across the ag landscape.

As you might imagine, one of the unpleasantries this year is explaining to folks, day after day, how low crop prices are, especially when they go lower than expected and stay down longer than expected. I already hear some saying, "Yeah that's nothing -- try being on this end of the quote machine."

I get it. Taking on risk, working hard, playing by the rules, but not getting paid is a recipe for a long line of stressful days and nights, something I was keenly aware of as I talked to farm audiences over the winter. To my constant amazement, even though times are tough, I rarely encounter outbursts of anger. Most I've met come to learn and try to understand, even when prices are in the tank. And many, I suspect, just keep it under their hat.

The difficult part of this winter's talks always arrived when the topic turned to soybeans. I explained that estimating U.S. soybean demand was nearly impossible in 2018-19 due to not knowing how trade talks with China would turn out. China had imported over a billion bushels of U.S. soybeans in 2017-18, and then we were looking down the barrel of a 25% tariff that would send the bulk of China's business to Brazil.

Eventually, I had to show my chart of 22 years' worth of cash soybean prices, indexed for inflation and arranged by the ending stocks-to-use ratios that USDA had predicted over those 264 months. With U.S. soybean exports down in 2018-19 and USDA estimating record-high U.S. ending stocks of 900 million bushels or so, the ending stocks-to-use ratio of 22% was pointing to cash soybean prices near $6.00 a bushel.

At the time of the talks, cash soybean prices were in the low $8 area, so the thought of a $2.00 drop from levels already considered low was not pleasant to face. I didn't like saying it, and I didn't like thinking about it. And judging from the winces in the audience, they didn't enjoy the experience much either.

Knowing that the bearish scenario described above was a possibility -- based on how trade talks might go -- I suggested buying inexpensive November soybean put options as a form of disaster insurance, in addition to the usual crop insurance.

Put options often don't pay off, but when they don't, it's usually good news because prices didn't go as low as feared. Last winter, an example I mentioned was to buy November 2019 $7.60 soybean puts for a little less than 4 cents each as a way of protecting 2019 soybean production -- just in case the bearish nightmare came true. As of Thursday, that $7.60 put option closed at 12 4/8 cents. The price protection it still offers is the important part.

As for crop insurance, November soybeans averaged roughly $9.54 a bushel in February. A plan offering 85% revenue protection means that protection would kick in around a November price of $8.11 a bushel, assuming this year's yield matched prior history. A higher yield would lower the price that protection kicks in at. On Thursday, November soybeans closed at $8.35 3/4 a bushel.

Crop insurance has its place, especially if you get hailed out or have some other bad luck, but so far this year, the combination of crop insurance and inexpensive put options is looking like a good form of protection in what could be a tough year for soybean prices.

Back in late February, when trade talks were going well and progress was being reported, I wrote, "What if Trade Talks Succeed?" https://www.dtnpf.com/… describing what we could expect.

Now, after media sources reported China tried to back out of prior trade commitments last week and President Donald Trump made the decision to raise tariffs on Chinese goods as of Friday, we need to review again what might lay ahead if a trade agreement with China is not reached by the fall of 2019.

As this is being written before Friday's next World Agricultural Supply and Demand Estimates (WASDE) report, no trade agreement means that USDA's current estimate of U.S. ending soybean stocks at 895 million bushels for 2018-19 is apt to exceed 1 billion bushels by the end of August. Not only will that also be a new record-high level of ending stocks, it puts the ending stocks-to-use ratio at 26% where we don't have any comparable pricing over the past 22 years. $6 a bushel for cash soybeans is still a reasonable fundamental estimate in such a scenario.

Unfortunately, the bearish news doesn't stop there. As I've explained before, in addition to the market's economic fundamentals, there is also an emotional component to markets. We often witness how prices are exaggerated lower by bearish emotion at harvest time after a successful growing year.

If the U.S. produces another big soybean crop of, say, 4.3 billion bushels or more, and the world's largest buyer of soybeans is still enforcing a 25% tariff against the U.S., I shudder to think how low soybean prices could go in the fall. Here in the U.S., October to February is the best chance for winning China's soybean business, but not if a tariff is blocking trade for a second consecutive year.

There are a lot of moving parts to the trade talks, and the way things are going, events could change quickly. For the sake of U.S. soybean producers, let's hope a decent agreement gets worked out. I would much rather see those puts expire worthless.

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

Follow him on Twitter @ToddHultman

(BE/AG)