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January 24, 2019

Soybeans: Murky statistical uncertainty, a bullish flash in the pan and underlying bear market realities

Despite the lack of uncertainty created by missing USDA statistics, neither politics nor southern hemisphere weather has dented beans' chronic global oversupply.
By Eric J. Brooks

An eFeedLink Hot Topic

Granted, there is a chance that once America's government re-opens, a surprising adjustment to US feed crop production or inventories could rattle markets. At this point, however, market observers focus their attention on the Brazilian and Argentine harvests, which are less than two months away from reaching the world market. Up to the early part of Q2, Latin America will influence soybean price movements more than US-China trade negotiation rumors.
--And much has been happening with southern hemisphere crops. As of the USDA's last report in December, the Brazilian and Argentine soybean harvests were pegged at 122 million tonnes and 55.5 million tonnes respectively.
–Since then, dry weather in Brazil and excessive rain in Argentina has made industry officials revise their estimate downwards. The weather has been particularly arid in the top feed crop producing states of Mato Grosso, Mato Grosso do Sul and Paraná, which have had 65% to 80% of normal rainfall. Within these states, soy crop yields have fallen by anywhere from 5% to 30%, depending on the locality.
Such arid weather prompted analyst firm INTL FC Stone to cut its Brazil soybean crop estimate to 116.2 million tonnes –Other estimates range even lower. For example, the Brazilian grain growers' group Aprosoja officially expects a soybean harvest of 110 million to 115 million tonnes. An industry average 115 million tonne harvest would be 7 million tonnes below the USDA's latest 122 million tonne estimate and 5.7% below last year's record 120.3 million tonnes harvest.
While dry weather is a problem in Brazil, excessive rains during the planting season have caused a reduction in Argentine soybean planted area and yields, with the latest estimate revising its expected soy harvest from the USDA's initial 55.5 million tonnes to as low as 53 million tonnes. The wetness also impacted corn planting, causing some acres to be shifted to wheat.

Despite these recent and possibly ongoing crop losses, soybeans still find themselves traversing a bear market bottom: In a worse case scenario, instead of peaking at a 115 million tonnes with 32.9% stocks-to-use ratio, closing world soybean inventories would still set a new record at 105 million tonnes, with a bloated 30% stocks-to-use ratio.

Moreover, with December Argentine and Brazilian soybean inventories estimated at 41.3 million tonnes and 21.35 million tonnes respectively, even a collective 7 million tonnes below expectations would not impact national supplies enough to disrupt exports. –Frankly speaking, soybeans are more likely to respond in a sustained manner to export-related transport and logistical difficulties than any genuine supply shortage.

–Hence, after rising from traditional US harvest time low of US$8.15/bushel to US$9.33/bushel after the December USDA report, CBOT soybeans never equaled their late-year peak. Instead, it has mostly traded within a 5% percent of US$9.10/bushel, with positive and negative US-China trade negotiation rumors accounting for most of the fluctuations. In all, soybean prices have risen 4% to 5% since the last USDA report. It is currently trading in the US$9.10-20/bushel range, with its 50 day moving average giving the appearance of a firm market bottom.

The only real price support for soybeans comes from the market's guess on China's buying strategy. Since resuming buying US soybeans in December, it has bought 5 million recorded tonnes of Fall 2018's harvest, versus nearly 25 million tonnes by mid-January of the previous year.

Commentators believe that to meet its own Q1 2019 needs, China's government is motivated to approve a total of 5 to 8 million tonnes of US soybeans to replenish state reserves and an additional two million tonnes for use by integrators.

On one hand, successful trade negotiations would lead to the purchase of more US soybeans. This would have more of an inflationary impact than purchasing an identical quantity of Brazilian soy. On the other hand, with some Brazilian states already starting their soy crop harvest, the window for exporting US soybeans to China is small and closing quickly.

Moreover, after importing 94 million tonnes in each of the previous two marketing years, December's USDA report expected China to slash soybean imports to 90 million tonnes –with a more recent Chinese government estimate cutting estimated 2018-19 soybean purchases to 87 million tonnes.

That implies that traders can "gamble" on a successful outcome to ongoing US-China trade negotiations temporarily spiking the price of soybeans when such announcements are made. Conversely, bears can buy put options that would bear considerable fruit if negotiations collapse and soybeans make a 10% plunge (with probable dead cat price bounce to follow) from their current US$9.10/bushel range.

--The problem is that neither political negotiations nor Latin America's weather woes are moving soybeans in a materially significant bullish direction. Hence, soybeans recent rising above their 50-day trading average at best implies sideways price movement and not the start of any significant rally.

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