An improvement in the outlook for corn and soybean, two key US grains, has been visible for some time now.
When it comes to corn the improvement should not surprise anyone: recently signed trade agreement between North American countries should lead to rise in exports to Canada and Mexico. Moreover, the US President Donald Trump mulls allowing the sale of gasoline containing 15% of ethanol through the entire year. Earlier such sales was forbidden in the summer period (“driving season) due to higher exhaust fumes emission associated with that kind of fuel. In case the permission is issued it would boost moods of corn producers and exports while deteriorating those of refiners and drivers themselves, especially those whose cars are not adapted to use of such gasoline.
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Create account Try a demo Download mobile app Download mobile appNevertheless, in this article we will focus mostly on soybean which prices are grinding higher for the second straight month. Is such rebound justified? What is the current fundamental situation on soybean? In our view it is not so great.
When it comes to corn or wheat we have seen a significant drop in the global stockpiles as well as deficit in the current season. Situation on soybean was similar few months ago but much has changed since. Namely, Chinese tariffs on soybean imports as well as good weather conditions in the US and South America led to significant build in the expected inventory levels and surplus on the market (higher production than consumption). Source: Bloomberg
Due to imposed tariffs and good weather conditions we saw significant revision in the recent months when it comes to inventory, production and consumption data. Amid newly imposed tariffs China decided to cancel current and do not place any new orders for the US soybean. It resulted in a shift towards Brazilian soybean. Despite higher production prices of the Brazilian grain kept raising. Moreover, the Brazilian soybean was also more attractive due to weaker currency. In turn the price of the Brazilian soybean almost completely converge to the US one with tariffs included. Difference in price is around 20% at the moment due to the latest bounce higher in the US prices.
Weaker Brazilian real gave competitive advantage to the Brazilian soybean over the US counterpart. This effect eased a bit lately but it is still significant. Source: Bloomberg, XTB Research
Difference between the Brazilian and US soybean stands at around 20%. Source: Bloomberg
Thursday (11 October) will be crucial for the grains market. The CONAB report from the Brazil will be published at 1:00 pm BST and it is expected to show increase in production. The WASDE report will be published by the United States Department of Agriculture (USDA) just 4 hours later at 5:00 pm BST. When it comes to the latter report estimates point at higher stocks and production as well as significant upside in the crop yield.
The WASDE report for October may not be too good for the grains market. Source: Bloomberg
The expected production is anticipated to rise just modestly but expected ending stocks are set for another huge increase, even despite over 100% increase since June’s report. Higher ending stocks estimates are viewed to rise by 7%, just as it was the case in the previous month.
Expectations of ending stocks in the US rose significantly due to the Chinese tariffs. Source: Bloomberg
On the chart below we present how price reacted to previous WASDE reports. Apart from the average, lower and upper bound reactions one also find reactions to particular reports that showed huge build in stockpiles and the September’s report depicted on the chart. As one can see prices moved lower in the first hour after reports showing huge builds were published and rose after a limited build (September’s report).
Soybean price reactions to report releases in particular months. Source: Bloomberg
Soybean prices could have behaved mixed due to the disappointment resulting from the exports data. Nevertheless, we could see an improvement lately in comparison to the previous 5 years. Moreover, we should expect exports to rebound due to the seasonality patterns. It should be noted that the United States are looking for new markets for its soybean and China is forced to buy some of the US soybean anyway.
The US soybean exports data improves. Source: Bloomberg
Last but not least, one should not forget about low speculative position on soybean. The net speculative position once again fell to the vicinity of extreme lows from the two previous years. Additionally, a possible inflection point can be spotted on the chart below as short positions begin to fall.
Positioning data suggests that soybean is significantly undervalued. Source: Bloomberg
Nevertheless, we think that the price may fall further due to the increases in stockpile estimates However, in the later periods price increases are likely to occur and they may be leveraged by the profit taking of short sellers. Having above in mind, we see potential in the pending long position on soybean - buy limit at 845 cents per bushel with a target of 990 cents per bushel and a stop at 775 cents per bushel.
Price probably reached its local bottom already but one cannot rule a minor pullback towards the lows from 2015. Source: xStation5
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