Soybeans: It Is Too Soon In The Season To Test $8.50 Per Bushel

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by: Andrew Hecht
Summary

A record Brazilian harvest.

The price of beans hits the skids.

The United States is the 800-pound gorilla in beans.

The growing season is just getting underway.

After four years of bumper crops sentiment is bearish but it is too early for price carnage.

At the end of May, the price of soybeans dropped to the lowest level since April 2016. On May 10, a late spring snowstorm in the United States and the monthly USDA World Agricultural Supply and Demand Estimates report caused all grain prices to move to the upside. The price of July soybean futures reached a high of $9.89 per bushel but the rally was short-lived, and the price has dropped like a stone since.

A huge South American harvest has weighed on the price of the oilseed, and the price has recently declined to lows of $9.0950 per bushel. The growing season in the United States is just getting underway as we are heading into the summer months and it may be too early for beans to fall below the $9 per bushel level. Over the weeks and months ahead leading to the harvest season for 2017, there is just too much uncertainty when it comes to the ultimate size of this year's soybean crop. However, after four straight years of record crops in the United States, we are heading into the growing season with great optimism that 2017 will be the fifth year where supplies are larger than growing global demand for all food and crops.

A record Brazilian harvest

Brazil is the second largest producer of soybeans in the world and given their geographic location in the Southern Hemisphere, while farmers in the Northern Hemisphere are enjoying time off during winter months, the planting, growing, and harvest season in Brazil are in full swing. At the same time, Argentina is the third largest producer of the oilseed and Paraguay is sixth. In 2016, the Brazilian and other South American crops were disappointing resulting in a June rally in the price of soybean futures traded on the CBOT. Source: CQG

As the weekly chart highlights, soybean futures rebounded from lows of $8.49 per bushel in late February 2016 to highs of $12.0850 by June 6. The appreciation of over 42% in three months illustrates the importance of the South American soybean crop each year. However, the weak crop of 2016 came at a time when Asia was suffering from a shortage of palm oil because of El Nino weather conditions, so the lower level of supplies occurred as demand for soybean oil increased dramatically. 2017 has turned out to be an entirely different story in Brazil and South America as the crop is at a record level.

The price of beans hits the skids

In 2017, we are seeing exactly the opposite of price action last year in the soybean market. Source: CQG

As the daily chart of the July soybean futures contract shows, the price has been making lower lows and lower highs since January. Soybean futures peaked at $10.9250 on January 18. As the crop season in South America developed into a bumper year, the price fell reaching a low of $9.0950 on May 31. The world has come to depend on bumper crops of agricultural commodities each year because of increases in global population and wealth. Each year, there are more mouths to feed around the world, and people are eating more complex grains. Therefore, the recent fall in prices was a result of the South American crop, but it is the world's leading producer that determines the path of least resistance for the price of the oilseed.

The United States is the 800-pound gorilla in beans

When it comes to soybean production, the United States is the world's leader. George Washington Carver discovered that soybeans were an excellent source of protein and oil in 1904. Henry Ford made plastic out of soybeans and in 1935 he used one bag of beans for every car he produced. World War II destroyed many of China's soybean fields and these days China is only the world's fourth leading producer. After the Second World War, the United States began production of the oilseed on a large scale and today beans grow in 31 states. Each year, the U.S. produces around one-third of the world's annual crop. Therefore, it is the weather and growing conditions in the U.S. that have the final say over the path of least resistance for the price of soybeans.

The growing season is just getting underway

Of all the grain markets that trade on the U.S. futures exchange, soybeans tend to be the most volatile when it comes to price action. Soybean futures attract speculators and traders because of their wide price variance at times. We have just witnessed a selloff that took the price of the oilseed to almost $9 per bushel but right now the growing season in the world's leading producing nation is just getting underway. It will be the weather and conditions across the 31 states where soybeans grow that will determine the 2017 crop and whether there will be enough to satisfy global demand. June and July are months of uncertainty in the soybean market as young crops in the United States are susceptible to droughts, floods, and other adverse weather conditions that could create shortages. Therefore, while the Brazilian crop was at a bumper level, there is still a lot of uncertainty about the U.S. crop at this time.

After four years of bumper crops sentiment is bearish but it is too early for price carnage

2016 marked the fourth straight year of bumper crops in the United States, and soybeans were no exception. Ideal weather conditions across the fertile Plains of the country created record crops of soybeans, corn, and wheat. Inventories have grown to record level, but the one constant from the USDA's monthly World Agricultural Supply and Demand Estimates report has been that while supplies have been abundant, demand continues to grow exponentially for grains each year. Therefore, the world has come to depend on bumper crops. In 2012, we saw what an off year for crops could do to the price of soybeans. The oilseed futures rallied to just under $18 per bushel, a record high. The next time there is a shortfall of soybeans because of weather or poor growing conditions, we are likely to see a similar move to the upside and perhaps a new all-time peak for the price of the agricultural commodity.

Soybeans were trading at around the $9.25 per bushel on the July CBOT futures contract on June 6 which is just too early in the season to be confident about this year's crop. If the U.S. produces the fifth straight year of record soybean supplies the price is likely to head back down to the $8.50 per bushel level or lower but there will be lots of demand from the growing number of mouths around the world that will soften the bearish influence of another year of massive supplies. However, if Mother Nature throws a curveball at the grain markets and the weather is not cooperative, watch out. The bottom line is that it is too early to sell soybeans down to a price that will make sense if conditions are ideal once again. The uncertainty of the growing season is likely to cause an increase in volatility in the soybean futures market over the coming weeks and given where the price is currently trading any surprises or short-term concerns about the weather will likely cause fast and furious price recoveries from around the $9.25 per bushel level.

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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.