The month of May has not been kind to the soybean market. In fact, I’d say it’s bearing the brunt of a perfect storm of bad news. Old crop, July soybeans are down more than 10% for the month while this year’s crop is fairing only slightly better. This beat down has come from all angles, including weather, speculative traders and the global economy. However, once the dust settles, this may prove to be the best buy of the summer.
The U.S. agricultural markets are all well ahead of schedule thanks to the exceptionally warm spring. The most recent crop reports show that soybeans are 76% planted. This record high is 34% above the five-year average for this time of year and 31% ahead of last year’s pace. These figures account for the 95% of U.S. acreage. This amazing crop progress has taken the starch out of the spring planting fear premium we normally see.
The crop progress reports signaled a cautionary note to the upward trend that began in earnest this past February. The early rally was fueled by the tightening global supply and exports to China far ahead of schedule. Small speculators and managed funds jumped on this rally in record numbers. I posted the overbought nature of the bean market when they set their first long position record in the March 20th Commitment of Traders report at 385,619 contracts. This compares to a net position of just 18,082 at the end of January. I think it’s safe to assume that last week’s record position of 480,586 will set the high water mark as many of these traders have been forced out of the market during the course of its 10% decline.
The final straw that’s broken the soybean bull market’s back has been the increasing concerns of a fractious European Union and its effect on the U.S. Dollar as a safe haven currency. The month of May has seen currency fly out of the European Union pushing the Euro to its lowest levels since September of 2010. Considering that the European Union is now China’s largest trading partner, it’s no wonder that China’s economy has also shown unexpected weakness. The last link is that China is our number one soybean export market. Therefore, it is expected that China’s purchases may slow, as U.S. beans become more expensive on the global market.
Now that we’ve identified the causes of the decline, let’s focus on where the bean market is headed. The early plantings were no free lunch. The early spring and the continuation of the same weather patterns are now raising concerns. The lack of rain is causing a crust to form in the fields and hinder the germination process. Furthermore, farmers who intended on growing early wheat and late soybeans (double cropping), need more moisture in the soil to get their late beans in the ground. Estimates vary as to how much double crop beans will add to total U.S. output but there is certainty that the weather is the key for next couple of weeks.
Finally, now that the froth is off the top we can return our focus to the supply and demand factors that called so many speculative dollars to the market in the first place. Soybeans and more specifically, high protein soybean meal are near record low supply levels. The decline in South American production has amplified the emphasis on this summer’s U.S. crop. Bellies must be filled regardless of the economic uncertainties. Global demand for food will be the last of the cutbacks made. Therefore, this decline is fortuitous for patient traders. There is strong technical support for this year’s crop near current prices of $12.50 per bushel. There is the possibility that a complete, “risk off” event could push the market to $12.25 or lower. Either way, the supply and demand numbers certainly suggest a test of the all time highs above $16 per bushel is well within the realm of reality.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.
