Soybean Strength Into South American Growing Season

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Palm oil started things going last year.

Meal lit the fuse.

A strong U.S. crop in 2016.

The crush is consolidating.

Soybeans show strength despite a higher dollar.

Grain markets have declined across the board since June. The fourth straight year of bumper crops in the United States added to inventories that were already high. Futures prices of the three major agricultural grain markets traded on the Chicago Board of Trade division of the Chicago Mercantile Exchange declined through the harvest season.

The world has become accustomed to bumper crops as the memories of the 2012 drought have faded. The U.S. is the world's dominant producer and exporter of corn and soybeans. America is also a major wheat exporter. Each month the U.S. Department of Agriculture issues its World Agricultural Supply and Demand Estimates Report or WASDE. The report is, in many ways, The Holy Grail, when it comes to grain prices. Over recent months, the WASDE reported the abundant amount of grains produced in the U.S. However, the report also highlighted that global demand for grains continues to rise at an exponential rate alongside population increases.

Last year it was the soybean market that sparked a rally in the sector before it ran out of steam during the U.S. growing season. Ideal growing conditions created the environment for another year of low prices. Meanwhile, the rally in the bean market got underway for reasons not related to the U.S. In fact, it was American exports that made up for shortfalls created in Asia and South America.

Palm oil started things going last year

In 2012, active month soybean futures traded to the highest price in history when they hit $17.9475 per bushel. By November 2015 after three years of bumper crops in the U.S., the world's leading producer and exporter of the oilseed, the price fell to lows of $8.4425, the price more than halved. The price of beans flirted with the lows and in March 2016 when it looked like the market was ready to make a lower low, it took off from the $8.49 per bushel level.

It turned out that the El Nino caused a shortage of palm oil in Asia and China began importing a soybean product, soybean oil. Beans rose through the $9 per bushel level as the demand for soybean oil increased. Then, a problematic winter in South America caused a poor Brazilian bean harvest. The first sign of a problem appeared in another soybean product as meal prices began to rise.

Meal lit the fuse

Just as crude oil refining produces gasoline and heating oil or oil products, crushing soybeans produces meal and oil which are products of the raw soybean. Soybean meal is a critical ingredient in animal feed around the world and the South American shortfall of beans caused meal prices to take off and raw soybeans quickly followed. Click to enlargeSource: CQG

As the weekly chart of CBOT soybean futures illustrates, the beans rallied from $8.49 in March to highs of $12.085 per bushel by the beginning of June. The increase of more than 42% in three months caused other grain prices to rally. Corn and wheat both staged impressive rallies during the spring of 2016.

A strong U.S. crop in 2016

When it became clear that the U.S. crop would make up for any shortfalls from South America, prices of all of the primary grains traded on the CBOT fell sharply. The price of wheat fell to the lowest price in a decade as global supplies grew after a near perfect growing season in most regions of the world. The price of corn moved back below $4.00 per bushel. When it comes to soybeans, the price declined from over $12 to under $10 reaching a low of $9.34 in late September during the harvest season in the U.S.

The WASDE report had been bearish throughout the growing and the beginning of harvest season. Grain supplies grew to record levels. Abundant supplies satisfied the world's grain requirements. However, the USDA warned, with each bearish report that demand continues to rise to a new record each month as a growing world population requires more food each day.

While corn and wheat traded down to new lows as U.S. crops were huge, soybeans never revisited the March lows. The beans stubbornly remained above the $9 level. The soybean market depends on South America to produce the marginal bushels of soybeans that the world requires to feed the masses.

The crush is consolidating

A great measure of the demand side of the fundamental equation for soybeans is the soybean crush spread. The synthetic soybean crush on the CBOT shows that the processing spreads is currently consolidating. Click to enlargeSource: CQG

The crush spread shows the effect of the huge rally in meal and oil that occurred during the spring of 2016. The crush rose to highs of 104 in late May. Since September, the March 2017 spread has traded in a range from 67.25 to 82.75, and was trading at 75 right smack in the middle on November 30.

Meanwhile, another growing season is now under way in South America and soybean futures are telling us that things might not be going so well.

Soybeans show strength despite a higher dollar

The U.S. soybean crop in 2016 was abundant. Moreover, the dollar has rallied above technical resistance at 100.60 in the wake of the Presidential election. A higher dollar makes U.S. exports less attractive on global markets and it tends to have a bearish influence on the prices of grains produced in the U.S. However, the price of soybeans has ignored the dollar and the stockpiles from the recent harvest and has been moving higher. Click to enlargeSource: CQG

As the daily chart of January soybean futures shows, beans have been making higher lows and higher highs since September. At the same time, open interest has grown from around 611,000 contracts at the beginning of November to over 727,000 last week, an increase of 19%. Rising price and increasing open interest provide technical validation for a rally. Last week, soybeans quietly rallied to $10.65 per bushel, the highest price since July before falling back to the $10.25 level. The beans broke above technical resistance at $10.31, the October 27 highs. Those highs were likely created by short-covering as the new-crop November futures contract was rolling to January.

I view the price action in soybeans as highly constructive. The bean market could be telling us that we are in for another weak Brazilian and South American crop this winter. Each year is a new adventure in agricultural markets. Weather is the ultimate arbiter of price. The world has come to depend on a bumper crop each year and if 2017 does not provide the market with the fifth straight year of bumper crops, watch out soybean and other grains prices could head much higher. The USDA has told us that demand continues to break records each month and that is not going to change anytime soon.

The price action in soybeans has been constructive lately. If the price c a n stay above $9.76 on the January futures contract, the bullish pattern of higher lows and higher highs will remain intact. I am a buyer of soybeans on dips and that goes for all grains. Eventually, Mother Nature is going to throw the grain markets a curve ball when it comes to the weather and the market is not ready for it given demand that is steadily rising. The downside is limited in the grain markets and the upside, well just look at 2012 to understand the potential.

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