If you want to know whether the rally in soybeans is over, ask a speculator. Hedge funds advanced their bullish bets to their biggest level since the 2012 drought this winter. They started to wean off that position a little last week, with more selling see after today's USDA report. Despite some big losses, May futures still remains in a steep uptrend. It's been that type of market for soybeans, with a lot of reversals higher and lower, and false starts and stops. Whether today's action was more than profit taking remains to be seen, but a correction is due after a big rally.
USDA came up with the type of math that's hard to argue with. The agency grudgingly cut its forecast of ending stocks, but only by 5 million bushels. Acknowledging stronger exports, economists raised sales estimate by 20 million bushels, to a record 1.53 billion. At the same time they took most of the impact of that away by cutting crush by 10 million and raising imports by 5 million.
Seasonal trends in bullish old crop years suggest this isn't the end, though it could be quite bumpy before the next turn higher. USDA made a 55 million bushel cut to its forecast of Brazilian production, but left Argentina unchanged. That could set up further reduction down the road from South America, but much depends now on what China does. The chart of crush margins there included in the full PDF version of the review shows profitability for processors at the bottom of its range. That's supporting rumors that China is seeking to sell previous bookings from Brazil, which helped dent prices today. That type of over buying is typical from processors, and the big gain in the July/November spread suggests those positions could indeed be rolled at a profit into new crop purchases.
Uncertainty over attempts to reform the Chinese economy may also underlie the market's nervousness. In addition to weeding out corruption and inefficiency in state-controlled businesses, the government is trying to dampen speculation in the Yuan and get growth under control. These efforts could lead to unintended consequences, including the type of economic slowdown presaged by recent data showing much weather than expected trade in February. There's a strong correlation between Chinese growth and soybean imports, so any trouble could ripple through agriculture, both here and there.
A pullback in futures now would still leave the seasonal trend for November following the pattern seen in bullish years. So prices are likely to stay elevated at least until planting is close to completion. That means there's time not to panic, but the current rally still offers a great chance to lock in close to a profit guarantee for 2014. The profit matrix for the average grower, assuming 85% Revenue Protection on trend adjusted yield is purchased, along with participation in the ARC program, shows at least a buck an acre profit no matter what the yield or harvest price is, if 35% of the crop is booked today.
You can download the complete report using the link below.
Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.
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