“Demand Driven Market”: Soybeans Are Turning Heads
Is it 2007 or 2009? I’m not trying to be cute here but it seems our commodity markets are showing us some signs that we saw way back in 2007. A few weeks ago I told you about how I was having a hard time talking about future rallies in the grains. I talked about bearish mountain. However since the March 31 USDA reports are soybean market has basically exploded. Now I am hearing those magic words that I heard way back in 2007, the vaunted demand driven market.
Of course over the last six months we saw that demand driven market for corn be almost completely destroyed. However as we look ahead it is interesting to see what is happening. It is almost like the last six months were kind of a practical joke sent to us from the nonfarm markets. For instance it seemed every day we heard that the fundamentals behind the commodity markets didn’t matter, it was all about outside markets taking grains down. Corn was one thing; we seem to have lots of corn now. However it’s pretty obvious to me that the soybean may be at the cusp of its own demand driven market. There has just been too much demand driven news from China followed by record exports out of the United States combined with production problems and South America.
This has soybean prices in Ontario over $12 a bushel. For those growers that are producing identity preserved soybeans with premiums over two dollars a bushel we are talking prices that we saw last summer. The new crop bids are not quite like that, however, it would seem with the problems we have with our individual soybean production which I documented a couple weeks ago, maybe the market is coming late to that realization too. Maybe this market needs to take soybeans a lot higher in order to satisfy the world’s insatiable demand for soybeans.
There seems to be something very different about this. For instance as many of you know I write the corn commentary for the Ontario Corn Producers Association. So most of my time is concentrated on corn but it’s almost the inverse relationship. For instance, if you analyze corn by default you are always looking at the soybeans because for the most part they are interchangeable. It is true that soybeans have their production problems and corn usually represents a better profitable opportunity, however maybe that is all changing now. It seems the outlook for soybeans is so much rosier than the big ending stocks in the corn complex.
The nuts and bolts of the soybean market aren’t quite adding up now. For instance we might be looking at the largest soybean crop ever grown in the United States this year but it was still 3 million acres less than what the trade had expected. Also too, you got the Argentine soybean crop down with estimates that about 35-37,millioin metric times. Combine that with China’s seemingly insatiable appetite for soybeans and soybean products and suddenly that 100 million bushel ending stock that nobody thought possible make come to fruition.
Is different now than in 2007 for a whole host of reasons. I don’t have to document in these pages the economic meltdown we all know that. However back in 2007 we were all talking about the ethanol gold rush. That hype is over. However you could make an argument now that at least for soybeans the same type of demand driven variables are at play, but the effects have been kept at bay because of the non-farm outside markets. Clearly though now it seems our agricultural markets led by soybeans seem to be shrugging that off a bit and looking ahead maybe there are bluer skies than we could have even imagined 2007.
The ramifications from this run-up in soybeans are obvious for the grain balance sheet. For instance in Ontario I’ve been widely quoted as saying we can expect 1.7 million acres this year. However we are looking at maybe a late start to the spring season with wet weather being a factor in the early going in Ontario. If that’s true here and is maintained across the American Corn Belt those corn and soybean acreage numbers surely could be jumbled going forward and that should make for a very volatile spring in the commodity markets.
Key to the way ahead in soybeans in my mind lays with those inverted futures months. I don’t claim to be a technical expert with regard to commodity markets, however, I can understand when nearby futures are at a premium to future months. That means “the commercials” want beans and they know something. The same happened just before the big run up in corn prices in 2007.
Does this mean that I might fulfill my dream and actually see $20 soybeans in 2009? Well, I dunno. It has become local legend here in southwestern Ontario that I actually predicted $20 soybeans. However, that was never the case, what I did say was I was dreaming about $20 soybeans. However, if they ever did reach $20 I’ll change my story.
It’s a run-up in soybean prices continues let’s take some lessons from what happened in 2007 and 2008. Some of us may have learned the hard way that prices don’t go up into perpetuity. There are obvious market opportunities coming in the soybean complex this spring. The challenge will be to not only grow that soybean crop but to market it effectively with this demand driven storm swirling around us.