The Soybean Dilemma: Beans in the Teens No More?

Despite the third largest North American crop on record and an anticipated strong South American crop, soybeans remain the bullish leader of the grain complex with the January contract hanging around the $13.30 per bushel range. Notwithstanding the yield recovery following the drought last year, soybeans prices have lost just 5.5 percent. In comparison corn has trimmed 40 percent.

‘Beans in the teens’ as the phenomena is often described in trading parlance, usually denotes bullish price action often associated with supply issues and weather scares that push prices to $13 a bushel and higher. This year farmers experienced more favorable weather and a strong bounce in overall yields despite a mid-summer weather scare. The dry August added risk premium to the market and sent the front-month contract price of $11.65 in August to a high of $14.09 per bushel a month later. In the end, the dryness had limited influence on the crops and prices drifted lower into the fall.

The trend turned bullish again after the WASDE report on November 8. Soybeans shot up 30 cents in one day despite the fact the department raised its average yield-per-acre estimate 1.8 bushels above its September guess. The one percent decrease in total acres harvested offset the gain in yields, generating what many analysts called a neutral report. In hindsight, that report was bullish as the USDA appeared to massively underestimate demand.

China’s Insatiable Appetite for Soybeans

Despite the fantastic harvest in the Midwest, prices remain elevated and industry insiders point to China. Unlike corn or wheat, there are few sources for soybean exports. The U.S., Argentina and Brazil provide the vast majority of the world’s supply. Watching a rapidly depleting pile of soybeans available in the U.S., the Chinese are either unwilling or unable to curb purchases until the South American crop details emerge.

Grain analyst Dave Norris thinks China isn’t taking chances for fear of a delayed crop in South America and logistical problems exporting beans from the continent. After the last harvest, ships waited as long a month to pick up shipments in Brazil ports. Norris told Bloomberg that sales and shipments since the marketing year began September 1 totaled 36.79 million tons, 93 percent of the total the USDA expects to export in the full season.

The reality is China may not have a choice. The Chinese middle class is larger than the entire population of the U.S., and as China continues to grow its economy the average citizen can afford to eat more protein. China must continue to import record amounts of grain to match the rising affluence of its populous.

 

Brazil ports lack the infrastructure to match export demand

Brazil ports lack the infrastructure to match export demand

Will Prices Finally Fall?

Should the South American crop grow as planned, the increased supply may finally squelch the record demand. Societe Generale (SocGen) and broker RJ O’Brien told Agrimoney.com that the high soybean prices relative to corn will push South American farmers to take away corn acres and plant more beans. By June, SocGen predicts soybeans prices will hit $11.50.

I am not in the prediction game, but for prices to fall significantly, a lot must go right in South America this growing season. The fall harvest in North America went as well as one could hope for yet we still have beans in the teens.

For the bears, they can take solace in contango. Today, the market believes future soybean prices will dip below $13 when the May contract comes off the board. Keep an eye on spreads as we close in on the next South American harvest for clues on the market’s direction.

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