Beans In The Teens Could Be On The Table In 2018

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About: Teucrium Soybean Fund (SOYB), Includes: ADZ, AGA, AGF, DAG, DBA, DIRT, FUD, JJA, RJA, TAGS, UAG, USAG
by: Andrew Hecht
Summary

Argentina lit a fuse.

Soybean meal exploded.

Farmers are planting more beans, but what if the weather does not help them grow?

Technical resistance at over $12 per bushel.

2016 and 2017 were scares - 2018 could be the real thing.

The United States is the world's leading producer of soybeans. Each year, farmers grow around four billion bushels of the oilseed. Demand for U.S. beans across the globe is brisk, and the most populous nation, China, buys around one-quarter of the annual crop.

Recent developments in trade have caused some concerns that retaliatory tariffs on U.S. exports of the oilseed could slow the flow of oilseed and soybean products from the U.S. to the Asian nation. However, that depends on the global crop at the end of the harvest season this coming fall. Almost 1.4 billion Chinese need to eat, and soybeans are an essential staple when it comes to both human and animal feed. The growth of the middle class in China has changed diets from rice-based to incorporate more complex proteins. Moreover, the trade tensions over recent weeks are likely nothing more than positioning for trade negotiations where an accord between the world's two leading economic powers will come to fruition.

Meanwhile, each year the ultimate determinate of the size of the soybean crop is the weather conditions across the fertile plains of the U.S. and other soybean-producing nations around the world. The 2018 crop year got off to a problematic start in Argentina.

Argentina lit a fuse

Drought conditions in Argentina caused a lower-than-expected crop yield this year, causing the price of the oilseed to move higher in early March.

Source: CQG

As the chart of May CBOT soybean futures highlights, the price moved to a high of $10.825 per bushel on March 2 as the dry conditions limited yields in the South American country. However, the price of beans fell to lows of $9.8350 on April 4 as fears of Chinese retaliation over U.S. tariffs resulted in selling. The price of beans quickly snapped back, and last week the USDA released its April WASDE report that confirmed lower supplies of the oilseed. The pre-report average estimate of 2017/2018 world carryout for soybeans was 92.95 million metric tons. However, the USDA told markets that they lowered their global ending stock number by 3.6 million to 90.8 million MTs, which was supportive for the price of the bean futures. May soybean futures settled at the $10.5425 per bushel level on Friday, April 13, and the new crop November futures contract was at $10.4950. The slight backwardation in the bean market is a sign of tight supplies.

Soybean meal exploded

Processors crush raw soybeans into products, which are soybean meal and oil. The oil is popular for cooking and is in many products we consume on a daily basis, like salad dressings, mayonnaise, and other food products. Soybean meal is the primary ingredient in animal feed. Therefore, those of us with carnivorous palates are indirect consumers of the meal via the beef, pork, chicken, and turkey we eat. The price of soybean meal moved appreciably higher in March, taking the raw beans along for a bullish ride.

Source: CQG

As the chart of May soybean meal futures illustrates, meal climbed to a high of $404 per ton on March 2, and after correcting to a low of $338 on March 20, it had returned to over the $381.10 per ton level by Tuesday, April 17. The new crop December soybean meal futures were trading at the $378.80 per ton level on Tuesday.

Consumers, other than those who enjoy edamame, tend to purchase soybean products that contain meal and oil rather than the raw beans. Therefore, strength in the products is typically supportive of the price of oilseed futures.

Farmers are planting more beans, but what if the weather does not help them grow?

The strong current level of soybean prices is leading farmers across growing regions in the United States to plant more soybeans than corn this year on their acreage. The long-term, four-decade average for the corn-soybean ratio is around 2.4 bushels of corn value in each bushel of soybean value. When the ratio is below that mean level, corn is historically expensive compared to beans, and when it is above, the converse is the case.

Source: CQG

As the chart of the price of new crop November beans divided by new crop December corn futures shows, the ratio currently stands at the 2.57:1 level, making the oilseed historically expensive compared to corn. Farmers tend to utilize their land for the best possible return. Therefore, at current prices, soybeans offer producers a better return on their investment.

Current projections by the USDA and plans of farmers when it comes to the crops they are planting are dependent on cooperation from the weather over coming months during the critical growing season in the United States and around the world. If the weather turns out to be dry, crop yields will suffer. And bad weather conditions this year are delaying the planting season in some states. Last weekend, parts of the Midwest received up to a foot of snow as the winter season refuses to come to an end.

Technical resistance at over $12 per bushel

The longer-term picture for the price of soybeans over coming weeks and months is bullish.

Source: CQG

As the monthly chart displays, beans made a low at $8.4425 in November 2015, and have been making higher lows since then. The most recent high came in June 2016, when the price reached what is now the critical technical resistance level of $12.085 per bushel on the nearby CBOT soybean futures contract.

Any shortfalls when it comes to bean production this crop year could launch the price of the oilseed above the 2016 peak price, and we could quickly see beans in the teens if the weather does not cooperate with production this summer season.

2016 and 2017 were scares - 2018 could be the real thing

Global demand for soybeans is an ever-increasing metric because of demographics. In Q1 of 2018, the world added 19 million people to its ranks, and since 2000, global population has increased from 6 billion to around 7.467 billion at last glance. Rising standards of living around the world mean that more people with more money are competing for food each day. The amount of arable land and appropriate climate for soybean production limits the amount of crops each year, and when weather causes a shortfall, prices have been quick to react to the upside. The 2012 drought in the U.S. sent soybean futures to their highest level in history at $17.9475 per bushel. In 2016, a palm oil shortage in Asia lifted the price of the beans to over the $12 level, and last year, fears of dry conditions in the Dakotas and Montana lifted beans above the $10 level briefly in July.

Each year is a new adventure when it comes to crop production and the weather, and any prolonged weather events could lead the price of beans to rally significantly from its current level at $10.50 per bushel. Meanwhile, demand factors continue to limit the downside, as the world has become addicted to bumper crops over the past half-decade.

Source: Barchart.com

The Teucrium Soybean Fund (NYSEARCA:SOYB) has traded in a range from $16.95 to highs of $28.88 per share since 2011. At $18.95, the ETF is a lot closer to the lows than the highs as we head into the uncertainty of the 2018 crop year in the United States. SOYB has net assets of $16.18 million and trades an average daily volume of 29,614 shares as of April 17.

With so many unknowns over the coming weeks and months, SOYB could be an excellent investment from a risk-reward perspective. Demand will limit the downside prospects for soybeans and this ETF product, and the upside has the potential to become explosive if 2018 is not the sixth consecutive year of bumper crops in the United States. Beans in the teens would cause SOYB to rally significantly from its current price level.

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.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodities equities. These long and short positions tend to change on an intraday basis.