Soybeans Is Being Pulled Down

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About: Teucrium Soybean Fund (SOYB)
by: Oleh Kombaiev
Summary

The supply growth rate in the global soybean market chronically outruns the market expectations.

The expensive dollar is a growing headache of the U.S. soybean exporters.

The soybean is overvalued in comparison with corn.

The only thing that now supports the soybean futures price above $10, is the expected weather problems in Argentina and Brazil. But, in my opinion, the market's belief in that this will actually happen is beginning to fade. The structure of supply and demand, as well as expensive dollar and corn, continue to pull soybean down.

Supply and Demand

The December USDA forecast introduced the minimal changes in the global structure of the soybean market supply and demand. However, these changes still shifted the market in a bearish direction.

Without going into detail, I would like to highlight the main thing - in December the USDA raised its global 16/17 soybean ending stocks forecast by 1.32 million tons to the level of 82.85 million tons. The interesting fact is that in each of the last five forecasts, the 16/17 soybean global ending stocks exceeded the analysts' expectations. I have an impression that the growth of the soybean market supply chronically outruns the market expectations.

The International Grains Council (the European analogue of the USDA) in its latest forecast was more determined than the USDA, and increased the global 16/17 soybean ending stocks by 4 million tons at once. Since September, according to the International Grains Council, the global soybean ending stocks forecast increased by nearly 9 million tons.

Source: IGC

Thus, not only the USDA projections indicate that the global soybean supply still outruns the demand.

The expensive dollar

The domestic soybean consumption in the United States nearly equals its export. Therefore, the dynamics of the dollar value has a significant impact on the competitiveness of the U.S. soybean in the international market. This means that, from the statistical point of view, there is an inverse relationship between the price of soybeans and the value of the dollar. The following graph displays this relationship:

It is worth noting that, within the framework of the said dependency, the current soybean price deviated from the balanced level upward by $1 (i.e. by almost one standard deviation).

The FRS's intention to accelerate the pace of raising the interest rate next year creates the basis for a stable stay of the dollar index value above 100p. This means the constant pressure on the soybean price.

ZS/CZ ratio

Over the last decade, the average soybean futures price was 2.5 times higher than the corn futures price. At the moment, this ratio equals three and still goes beyond one standard deviation. In other words, to date, the soybean price is overstated in relation to the corn price.

In my opinion, the corn market is not clearly bearish at the moment. However, one should not count on the price rally either, given the record-high stocks. That being said, corn will not allow the soybean price to demonstrate steady growth for quite some time.

Conclusion

Bringing it all together, I believe that this year soybean has already shown everything it was capable of. In my opinion, the soybean futures price is very likely to return to the level of $10 by January 2017.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.