Back to the Drawing Board

Written for Sevita by Bailey Elchinger, Risk Management Consultant and Regional Director, FCM Division of StoneX Financial Inc.

At the end of March, the USDA gave us a curveball in regards to soybean planted acres that sent producers ‘back to the drawing board’ when it comes to bean prices.

"The Board"

The USDA’s planting intentions survey pegged U.S. soybean planted acres at 86.5 million acres. This was in line with the pre-report estimate, but roughly 3 million acres higher than last year’s number. That high of an acreage number makes it easier to solve any carryout concerns the market could have. A trendline yield would lead to a very large crop, which would allow a growth in demand of nearly 300 million bushels without tightening the soybean carryout. This essentially makes weather less worrisome than once expected this growing season.

This month the market has also been forced back to the drawing board in terms of South American production. The CONAB agency in Brazil as well as private analysts have continued to lower their soybean crop estimates for Brazil while the USDA has not followed them closely in their reductions. This lack of reduction from the USDA is leaving many wondering just how big the crop will be? The Brazilian Real has also fallen sharply which allows the price of beans in Real to increase and entice Brazilian farmers to sell. This selling increases the supply of beans at Brazilian ports and thus allows Brazilian beans to be less expensive on the World stage.

Going Backward

One struggle that the market has been faced with this month is a lack of soybean demand. Many are beginning to lower Chinese soybean demand going forward. The Chinese hog herd continues to falter and is currently the smallest they have seen in three years. Hog margins in China are barely above breakeven due to a slow economy that has failed to strengthen post-COVID.

One bright spot for soybean demand has been the growth in crush and bean oil usage. The U.S. crush pace continues to impress the market and the long-term growth of the crush industry remains optimistic. One caveat to that is that the growth may not be as fast as some had originally predicted. Overall growth is good, but if production outpaces demand it still leads to increasing carryout.

Drawing the Future

Once back at the drawing board you can start to envision what the future might entail. There are key factors that will impact the future of the bean market. One factor will be the managed money short position that we discussed last month. While the fund position isn’t a record short it is still sizable and enough to leave them concerned about a potential rally in the future. That short position could lead to ‘short covering’ strength. Despite the large planted acres that are expected, traders will likely still be worried about weather in North America this summer and keep weather premium in the market until they are confident in the size of the crop.

Producers should remember that sometimes great pictures are still created when we go back to the drawing board. It is important to see the whole ‘big picture’ when making a marketing plan and that it’s okay to go back to drawing board at times as well.