While a stout rally in soybean meal and a weakening dollar undoubtedly got the ball rolling, the rapidly declining estimates for world soybean ending stocks are sustaining the bulls in the bean market.
USDA has had a pretty good track record of uncovering more global soybean consumption over time. With very few exceptions, consumption is larger and ending stocks are smaller a year later in the process. This is true for both the U.S. numbers and the world numbers. The June 10 report was no exception.
The world board analysts cut projected 2015-16 ending stocks from 74.25 million metric tons to 72.29 mmt. That was a 22.73% stocks/use ratio. That prior year ratio (2014-15) was at one point over 30% and is now down to 26.03%. Tighter stocks are well correlated to higher average cash prices.
The real kicker is the estimate for 2016-17 at 66.31 mmt. That would be a stocks/use ratio of 20.22% and would be the tightest since 2008-09, if it is still there after a couple years of global revisions. Given the historical tendency for these stocks numbers to go down, the market is justifiably nervous about the eventual ratio being even tighter. By the way, those 2008-09 stocks were accompanied by a high of $16.63 in July 2008. That one fell apart on a combination of better crops and a Wall Street meltdown. We can't rule either one out in 2016 or 2017.
So what are some of the variables that could potentially drive bean prices to the 2008 level, and what could stop them right here?
In the bull camp:
1) While up at the end of the week, the U.S. dollar has been in a downtrend since December. Further dollar weakness boosts commodity prices in dollar terms and aids U.S. export competitiveness.
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2) The CRB Index is a mirror image of the dollar. It has 38.2% Fibonacci retracement resistance at 435.10. The next points after that are 460.80 (50% retracement) and 479.00 (2/3 speedline). The latter would be a 9.4% move, equivalent to $13.03 in the soybeans. Weather can take you there, but the dollar is a key component.
3) The transition to a La Nina weather pattern has 50% odds for summer and 70% for fall. While the correlations for any given state aren't that strong, the pattern does seem to mean more heat and sometimes drier conditions. USDA's 46.7 bushels per acre yield figure is good for now, but only time will tell.
4) Both Brazil and Argentina will run out of export beans a lot sooner this fall than they did in 2015, due to aggressive early shipments and some crop problems. That offers an opportunity for much better U.S. exports between September and February.
5) World consumption growth continues. USDA currently shows China taking 4 mmt more soybean imports in 2016-17 than in the current year.
On the Bear side:
1) U.S. soybean plantings are very likely larger than the 82.2 million acres shown in the WASDE report. The bean rally should be incentivizing producers to plant more double-crop soybeans than originally intended. Some corn acres likely switched to soybeans after the shocking March 31 Intentions report. There are also likely fewer prevented planting acres in 2016 than were seen in 2015.
2) Rain makes grain. There are very few dry pockets in the U.S. soybean growing area as measured by the U.S. Drought Monitor. If the roots can get down there, the water is there for the first half of the season, with a few exceptions.
3) Both Brazilian and Argentine producers are seeing record high soybean prices in their local currencies, due to devaluations. Brazil in particular has incentives to increase first crop soybean acres. Argentina is complicated by the tariff differential and its big jump in corn prices at the farm level. That is an algebra problem, though, and a rise in the soy/corn ratio can offset the tariff advantage if the world market needs the beans.
4) Board crushes have to be unwound. The excellent margins have crushers holding historically large futures positions. They are long beans, and short meal and oil. With July futures deliveries coming up, those positions need to be unwound or rolled forward. Meal could be "broken" if the crushers choose to make deliveries instead of sell the cash meal. The spec funds are the big longs in meal.
There are other inputs to this always evolving market, but this ought to give you some things to watch for as we come into the end of June with its USDA Grain Stocks, Planted Acres and July futures deliveries.
Alan Brugler can be reached at email@example.com
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