August weather is critical for the US soybeans crop, and while the current crop conditions are among the best on record, the possible return of excessive heat during the first week of August opens the door for some yield uncertainty ahead.
The $1.60 break in just eight trading sessions into July 25th left the market in a short-term oversold condition, and it may take a continued flow of bearish weather news to find new sellers in the short-term. Open interest is down sharply over the past six weeks, and traditional technical indicators are oversold.
There seems to be enough rain in the forecast for the next week to keep crop conditions good, but a warmer and drier outlook in the 6-10 day forecast opens the door for some crop deterioration. The major weather models are not in agreement about this, but one of them shows temperatures in the mid-90’s to low 100’s for the plains and parts of the western Corn Belt by Tuesday, August 2nd. This has been a year in which the ridge patterns don’t last too long, but with the extremely oversold condition of the market, the less than perfect weather outlook may offer support over the near term.
The weekly USDA crop conditions update as of July 24th showed that 71% of the crop was rated good/excellent, versus 62% for the same date last year and the 10 year average for this time of year of 60%. There have only been four other years with higher ratings this late in the season, and final yields came in anywhere from 5.4% to 15.5% above trend in each of those years. Also, in 2004 69% of the crop was rated good/excellent and final yield was 6.3% above trend.
A good rating now does not always confirm a strong yield. In 2000, the crop was rated 68% good/excellent at this time of the year and actual yield was 4.2% below trend. In 2003, the crop was rated 66% good/excellent and actual yield was 20.4% below trend. In 1999, the crop was rated 65% good/excellent and actual yield was 6.9% below trend. And in 2008, the crop was rated 62% good/excellent and actual yield was 7.9% below trend.
|SOYBEANS Crop Conditions as of - July 24|
|Year||G/E Cond||% Trend Deviation||Year||G/E Cond||% Trend Deviation|
History suggests that it may be too early to assume a big yield. Traders are beginning to price-in record high yields, so the August weather will need to stay close to ideal, or the market will likely see a strong recovery bounce. The study above indicates how we should be cautious about expecting above-trend yield.
The supply/demand table includes 60 million bushels of “extra” old crop demand due to the old crop export pace, and it presents scenarios for yields that are at trend, 5% below trend and 5% above trend. If weather in August ends up being normal, we would expect at-trend or above-trend yield and adequate stock levels for the coming season. But with many weather forecasters looking at the possibility of a shift from El Niño to La Niña weather patterns that could spark a hot and dry pattern in August, we cannot rule out yield coming in below trend.
|USDA SUPPLY/DEMAND||16/17 "What If's"|
|Planted Area (M Acres)||77.4||75.0||77.2||76.8||83.3||82.7||83.7||83.7||83.7||83.7|
|Harvested Area (Acres)||76.6||73.8||76.1||76.3||82.6||81.8||83.0||83.0||83.0||83.0|
|Beginning Stocks (M Bu)||151||215||169||141||92||191||350||290||290||290|
If the yield was to come in 5% below trend, we could be looking at record low ending stocks and stocks/usage readings. It still may be a few more weeks before the trade gets a good picture of August weather.
In the recent Commitments of Traders Reports, trend-following funds reduced their net long position by just 19,531 contracts to a still-hefty 125,328. Open interest has fallen to its lowest level since March, and it is down 69,094 contracts since the COT update. This suggests that the funds may have reduced their net long position (and their overbought condition) even further.
For the August 12th USDA update, the USDA is likely to increase the export forecast for both old crop and new crop. They also have enough evidence from the crop ratings to inch up yield to 47 bu/acres. For this report, look for ending stocks for the 2016/17 season to come in near 251 million bushels, down from 290 million estimated last month. Also, look for 2015/16 ending stocks to come in at 310 million bushels, down from 350 million in the July update.
Suggested Trading Strategy: Buy November Soybeans at $9.74 ¾ with an objective of $10.43. Risk the trade to $9.62 ¼.
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