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.
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.
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:
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