Don’t Look a Gift Horse in the Mouth

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

The December 2023 commentary was titled “Don’t put the cart in front of the horse". This month I want to remind readers “Don’t look a gift horse in the mouth”. No, I am not a big fan of horses or anything – I simply found these to be fitting phrases for the soybean market recently!

"The Gift Horse"

Last month we discussed the ‘horse’ being the supply side of the World soybean balance sheet and how that is largely based on the size of the South American crop this time of year. While the growing season in Brazil started out poor, late rains and easing temperatures seemed to have solved many of those fears in mid-January. Through the first half of the month, the market took a significant portion of the weather premium out of the market. One could argue that the market ‘overdid’ it to the downside. Once the March contract found the $12 mark on the chart the market found some buying support, or at least lack of overall farmer selling. This allowed the market to bounce as we entered the last half of the month.

The other ‘horse’ in the commodity markets today is the overall managed money fund position. As of mid-month, the managed money, or funds, were net short on all 7 major commodities for the first time since late-2019. The CFTC reported as of January 16th the funds were short over 78,000 contracts of soybeans. While this doesn’t necessarily equate to a bullish factor for the commodities, history does tell us that it’s somewhat uncommon for the funds to remain net short for extended periods - especially through a growing season. This net short position may have contributed to the slight rally the bean market has seen recently.

The reason I am referring to the soybean market as the ‘gift horse’ is because the market has given producers a decent rally recently, that many were becoming skeptical we would see. As the saying goes – we shouldn’t judge the gift we are given by ‘looking it in the mouth’ (to gauge the age of the ‘gift horse’).

"The Mouth"

If producers were to look too closely at the ‘mouth’ of the 'horse', they may notice just how ‘old’ the gift is. Studying the World supply/demand tables that were published by the USDA it is easy to see that the World has plenty of beans sitting around. Part of the reason that we have adequate supplies is the overall lack of demand growth. The World has expanded soybean acreage and production in anticipation of continued growth in World demand, specifically from countries like China.

Chinese soybean demand has plateaued recently, in large part due to their economy slowing post-COVID. Both hog and soybean crush margins in China are negative, which is not enticing the country to import additional beans. In addition, the South American crop continues to loom large over the World soybean supply. While Brazil’s yield may not be a record in 2024, it is assumed that the Argentine crop will make up for any perceived losses. All of this adds up to a fairly ‘old’ looking gift horse that may not last long in our operation.

It will be important that soybean producers don’t “look this gift horse in the mouth” too closely. It might be best to take any ‘gifts’ given by the soybean market and be grateful for any pricing opportunities that come our way.