Soybeans – A Lifeline
Written for Sevita by Kendra Dauer, Risk Management Consultant, FCM Division of StoneX Financial Inc.
The Life Raft.
Through the month of January, the soybean market was ‘saved’ by technical momentum, managed fund support, and a turn in South American weather. After breaking to contract lows in December, the market was thrown a lifeline in January after a cut to yield and harvested acres in the monthly USDA WASDE report. With the USDA lowering yield by 1 bushel per acre to a national average yield of 50.7 bushel per acre and no changes to the demand side of the balance sheet, we saw the carryout tighten by 90 million bushels to 380 million bushels. I would be remised if I didn’t mention that this is still a very large carryout for U.S. soybeans, and the largest carryout to use we have seen since 2019. However, it appears that this was the news the market had been holding its breath for as it rallied post-report.
Follow through support came in the form of the managed funds short covering and adding new long positions to their books. Managed money positions saw a swing of bullish momentum after they moved from being short roughly 42k contracts last month to net long roughly 34k contracts this month. As we have seen with the corn market, money flow continues to add support to the commodity markets – with soybeans feeling those effects as well.
After a nearly ideal growing season thus far, South America saw dryness pop up in major growing areas that the market took notice of. While harvest is just getting underway in Brazil, a dry finish to the crop likely took the top end off the crop production. Additionally, last week news broke of Chinese customs blacklisting some major Brazilian soybean exporters. Sources cited phytosanitary concerns with shipments after some cargoes had been found with chemical contamination, pests, or insects. The import ban is expected to be temporary but will impact nearby shipments – keeping in mind that not all Brazilian exporters are on the ban list, but several of the larger ones are included. This news led the market higher last week, aiding the nearby contract to reach the 200-day-moving average before finding resistance.
Troubled Waters Ahead?
What could be lurking beneath the surface for the bean market… tariff threats? During President Trump’s campaign, he was relatively quiet on possible tariffs that might be imposed should he win the election. Following his win however, there have been numerous stories of possible tariffs that could/would be imposed. Were these empty threats to push other nations to the negotiation table? Maybe. Leading up to his inauguration, President Trump’s team seemed to adopt a softer approach as they stated they wouldn’t impose tariffs on day 1 of his presidency but would consider a longer drawn-out approach to when they plan to implement new tariffs.
Earlier in the month, we also saw guidance released from the outgoing Biden Administration on 45Z.; as a reminder, 45Z provides renewable fuel producers with tax credits – incentivizing production. The issuance didn’t make any drastic changes to qualifications for the 45Z credits, and basically punted the future of the credits to the Trump Administration. 45Z is part of the Inflation Reduction Act, which President Trump has vowed to dismantle in its entirety. This uncertainty could create turbulent waters for the soybean market as a repeal of these tax credits could disincentivize the expansion of renewable fuel production and consequently domestic demand for soybeans.
The soybean market was thrown a lifeline at the start of the new year, creating a selling opportunity for those still holding onto old crop bushels. It is important that producers don’t get caught in the pattern of treading water, waiting for the market to continue going up. No one knows what lies ahead or beneath the surface for the soybean market but what I do know is the market will never wait for you to make up your mind.
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