Hope Springs Eternal

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

Following a fairly ugly month of February, the bean market made a solid move higher during the month of March. This move has given hope to many producers across North America. But what caused it, and will it be eternal?

"The Spring"

The move began as the month of February wrapped up. It’s difficult to point to one solid cause for the rally, it was simply a mixture of things that inspired interest to the buyers:

Managed money currently holds roughly twenty percent of the bean market’s open interest. This doesn’t necessarily make them the ‘bad guy’, it simply means they are a key player in the market. We estimated that the funds were net short over 150,000 contracts in the bean market in late February. While this isn’t a record for the bean market it is a significant position and one that they typically aren’t comfortable holding throughout a growing season. It is believed that the funds began to fear the upcoming growing season and started to ‘cover’ that short position by buying.

Soybeans Managed Money Futures Graph

To spur along the buying, many in the market started to look at strong crush reports from the NOPA and USDA to bolster their ideas of strong demand. Cash bean crush margins, although off their highs, are still in the black – enticing crushers to push production. This showed the funds that there is still bean demand and started the fear that the bean market could do more than just go down. Many traders had also started to believe that the South American crop was ‘made’. It very well could be, but some weather reports out of Brazil and Argentina turned less ideal this month as well, leading some to start buying their position back.

Export demand has been less than ideal. North American beans are still uncompetitive with South American beans delivered into China as logistical challenges in the Panama Canal and the Red Sea are impacting global commodity flows. Overall Chinese demand is still lagging due to their struggling economy as well. Nonetheless, fear of the size of the South American crop began to creep into the minds of the funds as well, leading them to want to ease up on their short positions.

The USDA released its monthly supply/demand table mid-month. There were no changes made to the soybean supply and demand expectations – as the trade anticipated. This left all eyes focused on the all-important March Stocks and Acreage report that will be released on March 28th. It’s hard to stress enough just how important that report is in setting the tone for the remainder of the growing season. Fear of a bullish acreage number or stocks-on-hand measurement also scared the funds who were short.

"Eternal?"

The question remains – will the rally that we’ve seen hold after the report on the 28th? Will the acreage number be low enough to cause additional weather and production concerns to remain present? Will bean demand stay strong enough to cause supply concerns? I question whether or not either of these scenarios will come true. This leaves me questioning how much ‘hope’ we should have for the bean market – especially if the USA plants 85+ million acres of soybeans. As we discussed last month, if they plant 86+ million acres and don’t have ideal weather they can still easily end up with more than enough beans sitting around.

"The Hope."

One of the contributing factors to the up-swing, in my opinion, has been the ‘return’ of inflation fears to the general economy. As we have discussed in the past, one of factors that caused the market to rally 2021 -2023 was the inflation fears and the fact that commodities have historically been seen as a strong ‘hedge’ against inflation. As we saw inflation stall in late 2023 and some of those fears subside, in conjunction with numerous fundamental factors, we also saw commodity prices fall. We have recently seen talk of inflation returning to mainstream conversations. Has this talk renewed those fears and brought buyers back to the commodity sector? If that is part of the rally that we’ve seen, how long will the buying actually last?

 

Despite a nice move higher in the bean market producers should be cautious of having eternal hope that bean prices will remain strong. There are plenty of factors that could cause a leak in the spring.