Despite the consistently high probability of getting a record harvest of soybeans in 2015/16 marketing year, the political and economic instability in Brazil could lead to the soybean futures rally in the short term.
Soybean balance in the World and in the United States
Speaking about the soybean market, we should begin with the fact that the current balance of supply and demand in the U.S. market differs significantly from the global situation.
Based on the current USDA forecast, the ratio of the expected final ending stocks of soybeans in the United States to the volume of consumption and export (stock-to-use ratio) is 12.5%. This indicates that there is no shortage of soybeans, which is reflected in the price.
Source of data: USDA
If you look at the comparable figure worldwide, the situation is different.
Source of data: USDA
The current value of the global stock-to-use ratio amounts to 17.7%. It is 4.9% below the corresponding figures in May 2015. However, the price of soybean futures has not changed significantly over the same period.
In my opinion, the relatively low price of soybeans now is based on the anticipation of record harvests in Brazil and Argentina, as well as the seasonal increased importance of these countries in the global export market. And while there are no substantial weather threats to the projected harvest yet, the risks of economic and political instability are obvious.
The large-scale citizen protests, demanding the resignation of the President Dilma Ruseff, accusing her of involvement in corruption and economic crisis that is growing in the country, intensified in Brazil throughout March.
On March 14, up to 1.4 million people were involved in the protest activities in the biggest city of Sao Paulo. Altogether, up to 3 million people went out into the streets in 150 cities across the country on that day. The local population became more active on the Internet. Specialized groups in Facebook (NASDAQ:FB) and WhatsApp were being created. The situation worsened when on March 22 the President of Brazil refused to resign in spite of the opposition demands, calling the recalls to declare her impeachment as a "coup attempt".
The political crisis gripped Brazil last year and the country's economic situation continues to deteriorate. The unemployment rate in February 2016 rose to 8.2%, while in December 2015 it stood at 6.9%. According to the results of the 2015, the budget deficit amounted to 10.3%. The decline rate of GDP in the Q4 2015 reached 5.9%. The core inflation indicators haven't fallen below 9% for 8 consecutive months.
The situation is worsened by the need to combat the Zika virus. For this reason, in my opinion, there's a chance of relocating the Olympic Games, scheduled for summer in 2016 in Rio de Janeiro. In economic terms, this will have an adverse impact the country.
In short, the situation is heating up and the threat that the unrest in the country could degenerate into riots should be seen as a real possibility, followed by significant risks for the economy and the inability to timely export soybeans, in particular. By the way, the information about the delays in the soybean supply already appears on the Internet.
The money managers' behavior is symptomatic. In March the money managers cut down the number of net-sold contracts at a record pace. And, according to the last COT data, the current net-long position of the money managers amounts to 53,682 contracts, increasing by 31,908 over the past week.
Source: Saxo Group
The risks of economic and political instability in the short-term always prevail over the factors of demand and supply balances. Now May soybean futures quotes are consolidated within a local resistance at the level of $ 9.10. Overcoming this level opens the way to the market in the direction of $ 9.40 - $9.60.
Unless otherwise noted, all charts included are my own.
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