Todd's Take

A Bullish Riddle in Soybeans

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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Less than four months into 2020, November soybean prices have been pressured lower by disappointment in the phase-one U.S.-China trade agreement and by coronavirus concerns. Amid the bearishness, the Nov/Mar soybean spread has been trading at a bullish inverse, an unexpected sign of stronger-than-expected demand for the November contract. (DTN ProphetX chart).

It's staggering to try to comprehend some of the economic losses currently being racked up while we try to avoid breathing on each other, all in the name of slowing the spread of coronavirus. Just this week, the International Monetary Fund said it expects world GDP to be down 3% in 2020 and the U.S. economy to contract 5.9%, more severe than the negative 2.9% performance in 2009.

On Monday, April 13, DTN Ag Policy Editor Chris Clayton reported estimates from the University of Missouri's Food and Agricultural Policy Research Institute (FAPRI) warning of a possible $32 billion drop in farm receipts for crops and livestock in 2020.

Read more here: https://www.dtnpf.com/…

Government aid will make up some of the loss, but even after including those payments, Clayton said, crop farmers are expected to see a drop of $11.85 billion of cash receipts in 2020.

Surely, FAPRI had no way of predicting all the meat-processing plants that were closing down this week due to the complications of workers testing positive for COVID-19. Livestock with nowhere to go, more falling prices and food gone to waste as distribution problems erupt has all become part of the sorry and frustrating picture facing agriculture in early 2020.

Amid the mess, DTN's National Soybean Index of cash prices finished at $7.93 Thursday, April 16, down an even buck from the end of 2019. The early drop was related to disappointment in the details of the phase-one trade agreement with China. The more recent drop has been largely the result of coronavirus concerns that accelerated after news broke on March 7 the virus had spread to Italy and Iran.

With the economy in disarray and logistics becoming a bigger challenge each week, soybeans' bearish losses in 2020 are understandable. And it wouldn't be surprising to see prices succumb to more selling ahead. What is not so easy to understand is how the Nov/Mar soybean spread has been able to maintain a bullish inverse for most of this year.

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If that seems hard to believe, check the chart included with this article. You will see the November contract closed Thursday at $8.54 1/2, 9 cents above the March contract. November has been the more expensive of the two months for all but nine sessions this year, and the premium reached a high of 30 cents on March 23 -- no passing fluke.

Why would anyone want November soybeans so bad that they would pay a healthy premium over the March contract? We can rule out the typical speculative trader. Noncommercials can trade any contract they want and would have no reason to treat the November contract differently from other contracts.

Commercial traders are possible candidates as some may have concerns about having enough soybean supplies available in the fall. Soybean planting hasn't even begun yet, and we have a whole season of uncertain weather still in front of us.

But I'm not sure commercials would be willing to pay a steep premium for the November contract. There are several new-crop contracts that could help secure adequate supplies after harvest. We also know from CFTC data that commercials were net short in new-crop soybeans as of April 7.

The most likely candidate paying higher prices for the November contract is China. November is one of two new-crop soybean contracts that fits inside of China's traditional buying window for U.S. soybeans. There is no reason for China to pay as much for the March contract, as Brazil is usually harvesting by then.

If it seems surprising China would have such a strong need for soybeans in a year when coronavirus has squelched demand for several commodities, consider four points.

Firstly, according to RTTNews.com, the International Monetary Fund (IMF) said it expects China's GDP will be up 1.2% in 2020, salvaging a positive gain at a time when the country is trying to rebuild its pork production in the wake of African swine fever. In 2021, the IMF expects China's GDP will increase 9.2%, a strong rebound of pent up demand.

Secondly, USDA increased its estimate of China's soybean imports in 2019-20 from 88.0 million metric tons (mmt) to 89.0 mmt or 3.27 billion bushels (bb). Granted, that's a small increase, but showed USDA did not support concerns that China would be buying fewer soybeans, due to coronavirus.

Thirdly, USDA's March 31 Prospective Plantings report pegged soybean plantings at 83.5 million acres. Even with all of corn's demand problems, farmers are still likely to plant more corn than soybeans this spring, another factor that could lead to a smaller soybean surplus in 2020-21.

Finally, I recommend another article by Chris Clayton, "Soybean Export Update," published on April 15. In it, Clayton quoted Jim Sutter, CEO of the U.S. Soybean Export Council. Sutter noted good demand in China and said he expects China to come to the U.S. for soybeans somewhere between May and August this year. If true, that would be earlier than usual and good news for U.S. soybean producers. Read more here: https://www.dtnpf.com/….

I can't prove that China has been the driver of this year's bullish inverse in the Nov/Mar soybean spread, but the evidence is pointed in that direction. If true, it should be good news for U.S. soybean producers in the second half of 2020. Who knows, maybe we'll even see an easing of coronavirus concerns by then?

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

Follow him on Twitter @ToddHultman

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Todd Hultman