Soybean rally to reward?
11/29/16 — The last seven trading days have rallied soybeans from $9.90 on 11/17 to $10.56 on 11/28, a decent 66c rally in a short period of time. In contrast, corn futures are up only 6c in the same period. This at a time when there really hasn’t been any major change in weather in South America. The one positive item was the change back to original Congressional intent in the Renewable Fuels Standard by the EPA, which means more bean oil used for biofuel. That has propelled soybean futures to rally significantly in the past few days, making Pro Ag look at this rally and say, should we reward it with some sales?
South American (SAM) weather still has temps above normal for the next 7 days, and precip below normal for the 7 day forecast for most of South American except a band through the center of Brazil. That will allow planting progress to advance in Argentina, but may be somewhat concerning for Argentina if the weather pattern persists into summer. The 8-14 day precip forecast is normal for Brazil, but still below normal for Argentina. So that will allow planting to progress in Argentina, but again, the dry weather pattern could be concerning for Argentina if it persists all summer.
U.S. weather forecasts are still calling for mostly above normal precip for all production areas except the northern HRW wheat areas, which will see below normal precip the next 7 days including Oklahoma and Kansas. Temps are mostly above normal except for the western U.S., which will see below normal temps. However, in the 8-14 day forecast rain falls in Oklahoma, which will help the winter wheat crop there, as well as Texas and points east of there as above normal precip still persists for most of the country. Overall, this is a good forecast for the U.S. except Kansas, which stays relatively dry through the 14 day forecast.
Soybeans are rallying as if we have a 200 mb carryout projected, not 480 mb. Frankly, the past 4 years whatever we produced, China bought in exports. The market seems to be betting that China will do the same with a record 2016 production year as well. We’ll see if that is accurate, or if exports will slow down later this year (and are front end loaded this year).
With the rally Friday and Monday, we have hit our objective of $10.45 Jan. soybeans (trading 10.54 Monday morning) to price 10% of remaining soybeans in a storage hedge. We are doing a storage hedge (or futures fix) as the basis is still quite wide for both corn and soybeans (but improving). This sale is on 10% of remaining soybeans, so for those who priced 80% of what a normal crop is, and harvested a huge crop in 2016, this may be only a 4% or 5% sale. If your sales turned out to be 60% of a 2016 record yielding crop, then you have 40% left so this is a 4% sale. If you sold 50% of a 2016 crop, then this is a 5% sale. We are trickling out sales on the rally basically. We recognize this might be a small sale for some producers who sold aggressively earlier this year.
For new crop 2017 soybeans, prices rallied nicely as well such that we are trading futures as high as $10.35, not a bad place to start making 2017 sales of soybeans, either. In fact, most producers tell us this is a profitable price for 2017 crop with a good basis, and that they can make money on soybeans at these levels. That’s interesting considering private estimates are that soybean acreage will expand in the US another 4-5 million acres new year. The reason is because soybean prices are quite strong relative to corn or wheat. In fact, the soybean/corn price ratio for new crop 2017 futures is 2.67, meaning new crop Nov. 17 soybean futures are trading 2.67 times the Dec. 17 corn price. That ratio if over 2.4 generally favors expanding soybean acreage. Not only that, but the 2016 price ratio is even stronger in favor of soybeans at 3.02, so the memory of selling at this year’s prices favors soybean acreage even more. As we already stated, there are already private estimates that 2017 soybean acreage will be up 4-5 million acres next year, and that will certainly add to the soybean carryout. China is a strong importer of soybeans, but maybe even China can’t use up that many soybeans.