Has soybean already bottomed out?

Soybean prices have clearly underperformed lately on the back of trade frictions between the US and China - the two world’s largest economies. While China declared to buy almost all US grains available for exports some time ago, new tariffs being implemented by the US changed this view quite perceptibly. Beijing decided to retaliate and threatened to do so if Washington keeps slapping Chinese companies with fresh duties. Note that soybean is among the major US goods being exported to China, hence a 25% tariff rate is so important as it notably lifts costs of purchases of this commodity in the eyes of Chinese firms. What should we expect from both countries next? Over the recent weeks we have been offered quite promising informations for the US soybean market. However, will they be sufficient to boost soybean prices?

Trump offers aid for US farmers

Having mid-term elections scheduled for November there is nothing surprising that the US President Donald Trump aims to ease US farmers being hurt by the trade war with China. On that account, Donald Trump announced last week aid for US farmers being the most afflicted by the trade spat. Nonetheless, may the $12 billion programme be sufficient to restore confidence among farmers? There have been revelations that losses incurred by US farmers have already exceeded $12 billion. Notice that over the past decades US farmers were offered subsidies for soybean production worth at least $1 billion per year, whereas these subsidies were even bumped in the most recent years closing $2 billion. Assuming that the financial package put forward by the US President will be given to all farmers (those who plant soybean, sorghum, cotton, corn or wheat) the highest payment to soybean producers would reach between $2 and $4 billion adding between 30/50 to 60/100 cents per bushel. If this scenario realized it would mean that soybean production profitability would increase in line with the trend over the past three years.

Soybean productivity does not look so gloomy when subsidies are taken into calculations. Therefore, US farmers might be unlikely to switch to other grains. Source: Bloomberg, USDA, EWG Farm, XTB

The EU vows to increase US soybean purchases

The second upbeat news is the agreement between the European Union and the United States struck last week. Let us recall that the EU promised to "immediately" increase US soybean as well as LNG imports. This is a prerequisite to convince the US to remove steel and aluminium duties against the EU. It may sound quite well, albeit in the eyes of US soybean producers not too much is likely to change as the EU is incomparably a less important consumer of US soybean than China.

The EU is relatively negligible importer and consumer of soybean. Source: USDA, XTB

Furthermore, the EU does not need much more soybean as the latest environmental changes led to increased soybean production in EU countries. Therefore, one may suppose that the EU is unlikely to substantially increase soybean imports from the US.

The EU does not need more soybean looking at the current consumption levels. Source: USDA, XTB

Where is China looking for soybean to import? Brazil is the prime destination as the country is the world’s largest soybean producer outstripping the US already some time ago. This year’s Brazilian soybean output has been remarkable on the back of perfect weather conditions. What’s more, the weak real may also contribute to increased interest of Brazilian grain from Chinese companies. Indeed, since the beginning of this year we’ve seen a healthy rise of China’s imports of Brazilian soybean and a decline in case of US soybean. Moreover, the divergence in terms of exports has widened between the US and Brazil over the recent years.

Brazil outpaced the US in terms of soybean exports already several years ago. Argentina, even as it’s a relatively small exporter, it’s placed among top exports in the world. Source: USDA, XTB

What could be interesting Brazil essentially has not any soybean surpluses. Stocks are quite low, and are constantly depleted by rising consumption and exports. That said, once Brazil increases its soybean exports to China it may be unable to meet other countries’ demand offering a chance for US farmers, which might be seen as another slightly positive signal in the longer-term for the US soybean market.

Brazil holds no soybean surpluses as all production is either consumed or exported. Source: USDA, XTB

What might conclusions be drawn?

One may argue that China is in a way forced to purchase soybean from the US. Obviously, the pace of imports might slow down, but it’s highly unlikely that China decides to cut purchases altogether. Therefore, over the long-run one may expect simmering downward pressures on prices, albeit based on the available informations one may conclude that soybean may have already bottomed out. When we take a look at the seasonal analysis it turns out that soybean might experience a bounce before long.

Based on seasonal patterns soybean is placed among the most oversold commodities which increases the probability to see a bounce. Source: Bloomberg, XTB

Speculative positioning suggests that soybean is clearly oversold being well positioned to witness a bounce to the upside. Source: Bloomberg, XTB

What does technical analysis tell us?

We saw a lively rebound in the past week from 840c per bushel - the local lows drawn at the turn of 2015 and 2016. The current monthly candlestick may look encouragingly from a buyers’ point of view as we’ve been offered quite a long wick suggesting that bear may run out of ammunition. Looking to the past it’s hard to localize the similar pattern on the monthly interval. However, taking into account that the current candlestick one may count on a continuation of the current pullback. On the flip side, one cannot forget about risks related to slower US soybean exports. Thus, a possible support, if not reached yet, might take place in the neighbourhood of a 78.6% retracement of the long-lasting bullish wave between 2004 and 2012. To sum up, in our eyes long positions might be considered at this stage (alternatively, one may pay attention to corn as well). A possible buy limit order could be placed between 810 and 830c per bushel with a target at 1000c, and a stop loss at 730c.

The bottom in the soybean market might be just around the corner. Source: xStation5