Looking Ahead to the WASDE Report for Soybeans

  • 28 Jul 2016
  • By The Hightower Report
  • Topics: Agriculture

August Weather is Critical for the US Soybean Crop

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.

Figure 1.

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
1994 83 15.47% 2011 62 -2.88%
1987 76 6.76% 2015 62 6.47%
1992 73 10.94% 1986 61 7.37%
2014 72 5.44% 1990 60 5.81%
2016 71 - 2007 60 -1.22%
2004 69 6.34% 2001 57 -0.48%
2000 68 -4.23% 2005 54 6.82%
2009 67 4.22% 2006 54 3.57%
2010 67 1.77% 1995 54 -2.76%
2003 66 -20.44% 1996 54 2.14%
1999 65 -6.91% 1991 50 4.24%
2013 64 2.02% 2002 44 -6.37%
1998 63 1.46% 1993 40 -6.68%
1997 62 4.24% 2012 31 -8.23%
1989 62 2.20% 1988 25 -19.41%
2008 62 -7.88%      

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.

Figure 2.

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"
US SOYBEANS Jul Jul Jul Trend   Trend
  USDA USDA USDA Yield Trend Yield
  10-11 11-12 12-13 13-14 14-15 15-16 16-17 -5% Yield +5%
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
Yield (Bu/Acre) 43.5 42.0 40.0 44.0 47.5 48.0 46.7 44.3 46.7 49.0
       
Beginning Stocks (M Bu) 151 215 169 141 92 191 350 290 290 290
Production 3,331 3,097 3,042 3,358 3,927 3,929 3,880 3,677 3,880 4,067
Imports 14 16 41 72 33 30 30 30 30 30
   Supply,Total 3,497 3,328 3,252 3,570 4,052 4,145 4,260 3,997 4,200 4,387
       
Crushings 1,648 1,703 1,689 1,734 1,873 1,890 1,925 1,925 1,925 1,925
Exports 1,505 1,366 1,328 1,638 1,843 1,795 1,920 1,920 1,920 1,920
Seed 87 90 89 97 96 97 95 95 95 95
Residual 43 -2 16 10 49 12 30 30 30 30
   Use, Total 3,282 3,159 3,111 3,478 3,862 3,794 3,970 3,970 3,970 3,970
Ending Stocks 215 169 141 92 191 350 290 27 230 417
       
Stocks/Use Ratio 6.6% 5.4% 4.5% 2.6% 4.9% 9.2% 7.3% 0.7% 5.8% 10.5%

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.

Figure 3.

Suggested Trading Strategy: Buy November Soybeans at $9.74 ¾ with an objective of $10.43. Risk the trade to $9.62 ¼.

 

The information in this report may be considered dated upon its release and should not be considered interpersonal advice. This report is merely an opinion on the market and is a reflection of conditions as of its publication. Market conditions change! Traders should not consider entering positions without their own independent analysis of the market’s current situation, nor without further consideration of any changes to the information contained herein that may have occurred since this report was written. The authors are not responsible for any verbal or written claims and opinions that might be provided in conjunction with this report. The trading suggestions contained herein have been provided merely as a general guide and only for the purpose of quantifying the authors’ opinions.

This report includes information from sources believed to be reliable but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition.

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The Hightower Report is a commodity research and information firm that caters to individual investors, brokers, commercial producers, and end users. The Hightower Report broadcasts daily in more than 45 countries and publishes its Newsletter twice monthly to more than 20,000 readers throughout the industry.