Despite Springtime Planting, Soybean Bears Should Continue To Win The Day
BY JAMES CORDIER (Published by Seeking Alpha on March 25, 2015)
There will no doubt be a time this Spring when somehow, somewhere, somebody thinks it’s too dry or too wet in U.S. soybean fields. And on those days or weeks when the market listens to these stories and anxious bears or hopeful bulls start to inch prices up, the public may take the bait and start buying. When they do, you might want to start picking your spots to get short. If you do, the fundamentals will be on your side.
For while soybeans may be at "low" prices right now (at least compared to last year), and they do have a seasonal tendency to move higher in Spring – they have one staunch counterweight that is going to be difficult, if not impossible, for bulls to overcome: Massive, burdensome supply.
Weather, Seasonals and the South American Factor
Brazil now exports more soybeans than the U.S. Combining this with expanding Argentine exports makes South America a bigger soybean player than the U.S. South America harvests soybeans from March through May, right when U.S. planting is taking place. Thus, while traders were once focused almost exclusively on U.S. planting progress in the Spring, they now have to keep one eye on new South American supplies flooding the market at the same time.
April 2015 finds South America in the midst of what is expected to be a record soybean harvest. This includes Brazil producing 94.4 million metric tons (MMT) of soybeans.
Traders looking to buy soybeans because they are "cheap" may want to consider historical supply figures and how prices performed at that time.
At the time of this writing, soybean prices hover near $9.60 per bushel. U.S. soybean ending stocks and stocks-to-usage ratios are the highest since the 2006/07 crop year, when prices fell below $5.50 per bushel. In that year, Ending Stocks topped 550 million bushels. The Stocks-to-Usage ratio hit a record at 17.5%.
A full discussion of Ending Stocks and Stocks-to-Usage ratios and how they affect grain prices is featured in chapter 14 of "The Complete Guide to Option Selling – 3rd Edition."
To summarize, Ending Stocks measures the amount of product left over at the end of the crop year after all demand has been met.
Stocks-to-Usage ratio is the ending stocks vs. the expected demand of the upcoming crop year.
These are the two most important figures in grain price analysis. As a general rule (although past performance is not indicative of future results, and risk is always present), the higher the ending stocks and stocks to usage, the lower the price (and vice versa).
If you’re a soybean bull, you may be looking at this year’s (2014/15) U.S. Stocks-to-Usage ratio of 10.4% and seeing that while high, it is well below the 2006 record figure. With prices now approaching five-year lows, you might conclude that the market has now reached equilibrium or even be undervalued at current levels.
But if you jump to global soybean stock figures, a drastically different picture emerges.
Record harvests in Brazil and Argentina, combined with record 2014 U.S. production, has resulted in the highest global Ending Stocks and Stocks-to-Usage on record.
If one uses 2006 as a price gauge (when prices fell to $5.50 per bushel), 2015 soybeans still appear overpriced. While present demand probably makes a return to that level unlikely in 2015, global Stocks-to-Usage at 31% casts a decidedly bearish pall over the soybean market in the near future.
Conclusion and Strategy
Springtime U.S. planting and a currently oversold market make sporadic rallies in soybean prices likely in the months ahead. However, with massive South American supplies just now beginning to arrive on the world export scene, high U.S. planted acreage projected for 2015 and a wet weather pattern keeping U.S. soil moisture levels at nearly ideal readings, rallies would appear to be selling opportunities.
Without a considerable U.S. weather disruption this spring, soybean prices should continue to consolidate or push lower through the spring and early summer. An ideal growing season could see prices push back towards 2009 lows later in the summer.
July 2015 Soybeans
We, of course, prefer a call selling approach here, in case of planting issues developing. However, futures traders can look to trade this market technically from the short side.
If you’re trading the futures contracts, timing is important – so pick your points. The market currently appears oversold.
We’ll be seeking opportunities for positioning client portfolios in the soybean market over the next several weeks.