Looking Ahead to the May 10 USDA WASDE Reports

  • 2 May 2016
  • By The Hightower Report
  • Topics: Agriculture

2016/17 Soybean Supply/Demand Outlook

The improving global economic outlook, a return to growth in China, and a lack of alternative investments had global money managers flocking to soybeans and other grains over the past month. This was the primary reason for the dramatic price gains since early March. Soybean open interest was up 194,041 contracts (27.6%) from March 1st to April 19th, while July Soybeans rallied to a peak of $10.43 ¾, up $1.81 ¾ (+21%) from the March 2nd lows.

The rallies have been impressive, but as the weather normalizes in South America, the focus of attention will shift to the new crop (2016/17) season in the US, with the USDA’s first supply/demand outlook to be released on May 10th.

On top of surging fund trader interest, the soybean market has found support recently from strong buying by China. More and more traders are raising their forecasts for China’s soybean imports for the coming year, up towards 86 million tonnes from 83 million for 2015/16 (which itself was adjusted higher from 82 million this past month). This is also up from 78.35 million for the 2014/15 season and from 60 million for 2012/13. April flooding in Argentina is expected to eventually lower their crop outlook from 61 million to about 56-57 million tonnes. (The most recent USDA estimate put their crop at 59 million tonnes.) 

As a result, we look for world beginning stocks for the 2016/17 season to be adjusted lower to roughly 77 million tonnes, down from the record 77.7 million last year and down from 61.8 million two years ago. With near-record plantings in the US and further expansion possible in Brazil (as long as politics do not get in the way), world ending stocks are likely to stay near record highs, provided the weather is relatively normal this year. Argentina will likely see a shift in planted area away from soybeans towards corn, but the opposite is likely to happen in China. And if China’s production is strong, their import needs will shrink. 

First Look at 2016/17 US Supply/Demand

With world beginning stocks near a record high, demand for US soybeans in the new crop year could be diluted by large South America production. US beginning stocks are expected to be near 445 million bushels, a nine year high, and US planted area is expected to come at around 83 million acres, just shy of the record of 83.3 million.

If we assume a trend line yield estimate of 46.7 bushels per acre for this summer’s crop (versus actual levels of 48.0 and 47.5 for the past two years) then production would come in at 3.834 billion bushels and total supply at 4.309 billion bushels, which would be an all-time high.

If we further assume crush demand at a record-high 1.9 billion bushels and export demand at 1.775 billion bushels, up 70 million from last year due to strong demand from China, US ending stocks should still come in at 504 million bushels. This would be the third highest on record, and it would be up from the previous 8-year average of 193 million bushels.

If yield comes in higher than the trend line and manages to match last year’s level, then ending stocks could soar to a record-high 611 million bushels. 

Soybean Price Outlook

Some traders are concerned that the current El Niño pattern will shift to La Niña in the months ahead, which could cause threatening weather conditions and lower yields in the US. However, other traders see the pattern shift occurring later in the year, which would have little or no impact on the upcoming crop.

While the soybean market will be sensitive to yield-reducing weather, the market’s surge higher over the past six weeks appears to have been a premature weather premium that was built for the possibility of harsh weather ahead. But it may be 4-6 weeks before the weather becomes a critical factor. This leaves the market vulnerable to a major correction over the short-term.

We look for November Soybean price targets to be yield-driven this year:

Yield
(Bu/Acre)
Price Target
November Soybeans
48 $7.52
47 $8.24
46 $9.00
45 $10.53
44 $11.01

Suggested Trading Strategies:

  1. A 50% retracement of the contract high to low break leaves key resistance for November soybeans at 1053 ¼. Look to sell November Soybeans at $10.53 with an objective of $9.22. Risk the trade to a close over $10.73.
  2. Buy a July Soybean short-dated new crop $9.80 put for 17 cents with an objective of 51 cents. Risk 9 cents from entry.
  3. Sell the July 2017/November 2017 Soybean spread at 37 cents or better with an objective of -22 cents. Risk a total of 13 cents on the spread.  

 

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.

About the Author

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.