Death by a Thousand Paper Cuts

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

The soybean market truly felt like ‘death by a thousand paper cuts’ this month. So far in February the SH contract has not managed to string together more than two days in a row closing higher and has lost over 65 cents so far.

"The Paper."

As January ended the soybean market was reminded of the looming large crop coming from South America. While the crop is smaller than originally thought, it is overall still going to be very large. In addition to expecting a large ‘new crop’ supply there were also rumors swirling that, due to rapid acreage expansion in the last growing season, the supply of old crop Brazilian soybeans is much larger than previously thought. This helps explain one of the reasons for the steep discount that Brazilian beans have compared to North American beans.

The significant price advantage that South American beans have to North American beans can also be attributed to the logistical challenges we are facing. The Panama Canal is essentially closed to major vessel traffic currently. That canal would typically carry the bulk of North America’s commodities to places in Southeast Asia. The next shortest route for commodities leaving New Orleans destined for Asia is through the Suez Canal and the Red Sea. The Israel/Hamas/Gaza conflict has many vessels also avoiding that route. These two factors force the bulk of North American commodities to travel around the Cape of Good Hope or Cape Horn to reach Asia. This has dramatically increased shipping costs from North America and been a large factor in our lack of competitiveness with places like Brazil and Argentina. All of this has left North American soybean exports well behind the pace needed to meet prior USDA expectations - before the USDA lowered their expectations in the February report.

An additional factor hampering soybean exports is the sheer lack of global bean demand. China has typically been the World’s largest importer of soybeans. Today Chinese soybean crush and hog-producing margins are running in the negative territory. China’s economy is also struggling to reach pre-Covid levels. A sour demand outlook from China also likely contributed to the continued selling in the bean futures market.

Mid-month the USDA released their yearly Ag Forum estimates for 2024. These acreage, yield, and demand estimates are just that – estimates. They are not based on any form of survey data. The USDA estimated U.S. soybean acres at 87.5 million acres, which was much larger than many expected. The estimated 2024/2025 carryout was pegged at a whopping 435 million bushels. This added selling pressure to the bean market as well.

"The Cuts."

As the soybean market began to fall the speculative funds joined the ‘fun’ and began inflicting small “paper cuts” of their own by selling futures. The funds have now amassed a net short position in the bean market, ‘betting’ that the market will continue to go lower. Historically, a massive fund short position eventually gets ‘covered’, or bought back, which CAN help the futures market move higher. The caveat to that thought this year is the fact that the North American farmer is still holding a bulk of last year’s crop. This makes them a ‘willing’ (forced) seller of beans any time there is strength in the market. Any slight ‘rally’ has been sold this month. When it has been sold the futures market closed lower than the prior day’s low. It is this type of price action that has made it feel like ‘death by a thousand paper cuts’. There have not been many days with significant (20+ cents) price moves lower – but simply a lot of small down days adding up to a significant loss.

It is vital for producers to remember that each seemingly harmless ‘cut’ can add up to a really sore wound. To help protect against paper cuts one should always handle the ‘paper’ (bearish news) with care. Growers who contract a 2024 food-grade premium take a step to "protect" and "heal" themselves from an otherwise discouraging market.