One of the perils I warned about in the soybean market kicked into gear this week, throwing a wrench into futures' move back above $15. Fireworks likely aren't over for beans, but the volatility isn't over either, not by a longshot.
One of the slides I included in presentations this winter showed the correlation between China's appetite for imported soybeans and GDP growth. The two have gone hand-in-hand during the soybean boom. But when growth sputters, so do imports. That's what made the recent attempt by the government to tamp down growth troubling.
Those fears came to roost last week with news several Chinese buyers defaulted on purchases. Crush margins in China are weak, as we've reported for a while. But the defaults had nothing to do with processor margins, at least not directly. The Chinese government's efforts to slow down growth were an attempt to introduce reforms to many of its industries. At the top of its hit list is a banking sector that makes the sub-prime housing lenders who caused the 2008 crash in the U.S. look like George Bailey from It's A Wonderful Life.
Turns out the companies that defaulted booked soybeans and used them to secure cheap loans from lenders they used for other businesses. When it came time to actually take delivery on the soybeans and pay for them, the government's crackdown meant they couldn't get financing.
Tighter credit in China could slow down growth, and with it soybean imports. That could be a problem for the 2014 crop. For now, however, the question is how many more defaults will follow.
If the problems are limited, demand must be rationed the old-fashioned way: through higher prices. That's what drove beans back to $15. Of course, some sales are rolled from old crop to new at the end of every marketing year. This year anyone long old crop has made money on the spread to new crop, making this rolls even more advantageous.
USDA's April 9 supply and demand report suggested more adjustments will be needed on the balance sheet to keep the U.S. from running out of soybeans. That includes imports, which USDA put at record levels. Right on schedule news broke of Brazilian beans arriving in the U.S. but many more cargoes will be needed.
Old crop fireworks could take new crop futures higher, perhaps to $13 or better if there's also some weather issues here in the U.S. But there's plenty of downside for new crop, too. Average cash prices could fall below $11 with normal yields and the acreage USDA reported March 31. If farmers plant more beans, as our Farm Futures survey found, prices could fall below $10, an unprofitable level for most growers.
That's why we recommended pricing 35% of new crop by the end of the first week of April at levels high enough to guarantee a profit, if good Revenue Protection crop insurance was purchased and coupled with participation in the Agriculture Risk Coverage program of the 2014 farm bill.
For now, look for prices to consolidate recent gains unless news from China really turns sour. Mid-May typically brings more pricing opportunities, setting the state for whatever weather brings during the summer.
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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