Planting season is under way in the United States and each year is always a new adventure when it comes to the ultimate size and health of crops. After four straight years of bumper yields in the U.S., prices have chosen to focus on the stockpiles that are sitting in storage from recent years rather than the uncertainty of this year's harvest.
As the spring season approached, the prices of soybeans, corn, and wheat on their May futures contracts moved lower from peaks during winter. Soybeans have declined from highs of $10.8825 on January 18 to recent lows of $9.365 on April 4. Corn has dropped from $3.8725 on February 16 to lows of $3.5425 on March 27. Wheat, a commodity that has been under siege as a result of massive global supplies, has fallen from $4.77 per bushel on February 16 to $4.165 on March 31. The grain markets have become accustomed to conditions where supplies are more than sufficient to meet global demand. The U.S. Department of Agriculture has reminded the markets of growing and record demand around the globe in its World Agricultural Supply and Demand Estimates report each month. However, prices continue to feel the pressure of recent years where Mother Nature arranged for almost ideal weather conditions across the fertile regions of the U.S. While all of the three primary grain futures remain close to recent lows, soybeans have been the worst performing commodity in the grain sector.
Soybeans have been weak
Last spring, the price of soybeans soared to highs of over $12 per bushel in June as the South American crop was weak and uncertainty about U.S. yields reached a peak during the planting season. Source: CQG
As the weekly chart highlights, nearby soybean futures reached the highest level since August 2014 last June at $12.0850 per bushel, but since then the oilseed has been moving to the downside. In April 2016, the price was at $9 on its way to$12, but this year there has been a change in fortune as South American yields, and the prospects for more bean planting in the U. S. have weighed in the price. While the price is still higher than last year at this time, the trend remains lower. However, with the uncertainty of this year's weather and early selloff, we could be in for another reversal of fortune in the soybean market in the weeks and months ahead if the crop does not live up to current market expectations. Source: CQG
The daily chart exhibits a deeply oversold condition, and over the past few sessions, beans could be forming a bottom. Soybeans traded just below the August 2 lows on the May futures contract but remain well above the August lows on the new-crop November contract. Source: CQG
November beans are just under the $9.50 per bushel level with critical support all the way down at $9.035, the August 2, 2016, lows. There is still downside room on a technical basis, but the momentum indicator has crossed to the upside in oversold territory, and the chances for a price recovery have increased because it is still too early in the season for certainty about another bumper crop.
While soybeans have been declining and are sitting near recent lows, corn has done much better.
Corn has done better
Meanwhile, new-crop December corn futures are still hovering around the $3.90 level, and the reason for the divergence between soybean and corn prices is probably the fact that farmers have been planning to plant more beans in 2017 because of the value relationship between the grain and the oilseed.
The farmer's choice spread could be the reason
When it comes to planting season, many U.S. farmers have the option of planting corn or soybeans on their acreage. The long-term average of the corn-soybean new-crop spread is around 2.4-2.5:1, meaning that the norm for the value spread is around 2.5 bushels of corn value in each bushel of soybean value. When the spread is below 2.4:1, farmers tend to plant more corn than beans and when it is above the 2.5:1 level they plant more soybeans as the oilseed is more valuable and produces a better return on their land. Source: CQG
As the daily chart of November 2017 soybeans divided by December 2017 corn futures shows, the spread has moved from over 2.7:1 in late 2016 to 2.43:1 recently. From December through the end of March, the spread told us that soybeans would yield a better return and many farmers sold November soybean futures to hedge or lock in prices as it was their intention to grow beans. The hedging activity weighed on the price of soybean futures. However, as planting season got underway, over recent weeks, the spread fell back to its long-term average level, and now some farmers could be buying back short hedges in the soybean market and switching their planting intention to corn. The change in the new crop corn-soybean ratio could be a contributing factor for the recent consolidation in beans around the lows. Farmers could be adding a degree of support to the bean market because of the spread.
Meanwhile, if farmers switch to corn it could put some pressure on the grain over coming sessions, but strength in another commodity that is a refined product from corn could provide support.
Corn is watching ethanol demand
The U.S. is the world's leading producer of corn and the grain is the main ingredient in the production of ethanol, the biofuel. Over recent weeks, as we head into driving season, the price of gasoline futures have moved higher. Source: CQG
As the daily chart of NYMEX May RBOB gasoline futures illustrates, the price has increased from $1.5824 per gallon in the middle of March to $1.76 as of April 10. Gasoline in the U.S. is a blend of the oil product and ethanol. Source: CQG
The daily chart of May ethanol futures highlights the rise from $1.4960 per gallon on March 8 to $1.6480 as of April 10. If gasoline and ethanol prices, which are closely correlated, keep increasing as demand increases over coming weeks, corn inventories are likely to decline providing support for the price of the grain even if farmers decide to switch from beans to corn because of the drop in the corn-bean ratio.
Meanwhile, the bottom line is that this is the most uncertain time of the year when it comes to the path of least resistance for grain prices.
The weather is the critical question mark
Last year, prices rebounded from April through June in the corn and bean markets as lower South American yields and the uncertainty of the crop season resulted in early season buying. It became apparent during the summer of 2016 that the crops would once again be sufficient to meet demand and more, so the markets turned south in a hurry. This year, we have already witnessed an early season sell-off in the two grain futures markets. The weather over the coming months is the critical question that only Mother Nature can answer at this point. Right now, soybeans are oversold and may have declined too much with so much uncertainty over the coming months. At the same time, the rebound in gasoline prices will create more demand for corn as the U.S. economy is growing at a moderate pace and the chances are Americans will put more mileage on their vehicles this year compared to last.
I view the recent sell-off in the grain markets as a buying opportunity. I am not wildly bullish unless of course, we see drought conditions develop over the coming months. However, the early season selling has created an oversold condition in soybeans. Since beans dropped the hardest, they are likely to experience the most significant rebound in price. Global demand for grains continues to reach new record levels because of demographics. I am trading the corn and beans from the long side and will only buy on price weakness. Over the coming weeks I will be a scale-up seller and scale down buyer in each of these futures markets, but I will maintain a small core long position just in case we see an unexpected drought. The last time that occurred was in 2012. In that year prices for both agricultural commodities rallied to all-time highs.
Soybeans and corn planting is underway and the only sure thing in the markets right now when it comes to the path of least resistance for prices is that the recent selloff has come before enough data is available. The weather will be the ultimate judge for the 2017 season, and right now bean prices have priced in another bumper crop. I believe it is just too early to come to that conclusion.
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