The USDA reports their global Supply and Demand figures this Friday at noon Eastern. This report frequently sets the tone for the rest of the year with the fast and wild action affecting the beans in the bin while the long-term effects play out on the beans in the ground. There’s no denying the seasonal effects of this report on both markets. Post June USDA Supply and Demand leads to one of the most predictable declines in seasonal market forecasting as beans fall through the end of July. Finally, the table is already massively stacked against bean prices with record acreage being planted with the expectation of record yields. Barring any unforeseen weather catastrophes, which are unlikely in our part of the world in an el nino year like this one, the 2014 US soybean crop should be a record setter by a wide margin. But….
The soybean market has already sold off nearly 20% since the May planting fear high. I went back through 20 years worth of data and I only came up with three instances when soybeans sold off in any degree of consequence between the April planting numbers and the June USDA report. Typically, we’ve seen the market trade sideways to higher as it rations out the last of the beans in the bin while pricing the beans in the ground highly enough to justify their acreage. This what creates the pre planting seasonal rally, followed by the stall and finally the grind lower through the end of July and water issues begin to come into play.
The near 20% decline since the May highs already puts this market into the outlier category but that’s not the only development that makes this year a bit confounding. The last ten years have seen the bean market decline through the summer in seven of them. The average decline has been 19% with the largest decline coming in at more than 36% in 2004. Given the usual seasonality along with the sell off that’s already in progress one begins to wonder if the effects could be cumulative. Will we see a decline of 39% from the May high of $15.36 and trade all the way down to $9.37 per bushel? I don’t believe we will and neither does David Hightower of the Hightower Report. His projected low for this year’s crop is $10.16. This low would penetrate both the 2013 and 2011 lows. I’m not sure the market will trade that low although, it wouldn’t surprise us due to the fresh selling that penetrating those lows would likely trigger.
The above scenario would uphold my long held belief that the market will always work in the way that will create the greatest amount of pain for the greatest number of participants. I believe that generating fresh selling on a penetration of multi year lows would attract new short positions along with further index fund selling. I think commercial long hedgers who are already putting forth a substantial effort to put a floor under this market will eat up their sales. Returning once again to the typical pattern, the market grinds along with little participation one way or the other through planting. Once the summer sell off commences, we tend to see commercial long hedgers step in to fill their needs. Commercial traders have purchased an average of 61,000 contracts in the seven years that the market declined over the last ten. Conversely, the three years the market traded higher after the June USDA report, commercial producers stepped in to sell an average of 87,000 contracts.
Currently, commercial traders are long about 25,000 contracts. This is the largest net long position they’ve had since December of 2011. Clearly, commercial consumers feel that beans are near bargain prices as global demand continues to grow with the global stocks to usage ratio surpassing 90% this year. It really appears that for all intents and purposes, commercial traders are simply booking their future input costs at consistently lower prices. Using this commercial trader chart we can see that commercial consumers are willingly buying more beans at higher prices than they have since possibly December of 2011 when beans were trading at $11.07 and the commercial traders were net long around 28,000 contracts. Don’t think for one second that they’re nearing the end of their net purchases, either. Their net long record is nearly 90,000 contracts from April of 2006. Furthermore, it appears that when the commercial traders start buying early and buying in bulk, they’ve been generally correct through the bottoming process.
We believe that any sell off related to Friday’s report would be short lived. Trend traders, small speculators and index fund selling have led the market’s near 20% decline from the May highs. Assuming that index traders are net neutral, this means the driving downward force has been due to small speculators and trend traders. Based on the commitment of traders reports, we trace the general net capacity of both groups and it appears to us that they may be running out of firepower. Commercial traders are value players pricing the commodities they deal in into their bottom line. They have been net buyers in 14 out of the last 17 weeks and their buying has increased sharply as the market has fallen below $14. We’ll throw our hats in with the commercials and look for soybeans to buy following Friday’s USDA Supply and Demand report.