The USDA updated their supply and demand outlook on Friday, with limited fanfare, as should be expected with a March report. On paper soybeans are incredibly boring. Supply is more than adequate, with Chinese demand the first two months of the year disappointing.
As of Tuesday, speculators had amassed a record short position in beans, with selling seen every week for the last 3 months or so. Value-wise we had lost nearly $3.00 a bushel off the May contract from its November 15th high to its end of February low.
The storyline seems set, we have more than enough beans in the world, with Argentina’s 25 mmt year over year recovery in production more than enough to offset production losses seen in Brazil. A poor start to the calendar year for China and worries over their economy has added to the bearish sentiment, with traders talking about an import outlook in the low 90’s instead of the low 100’s seen this past marketing year.
As I said, on paper, beans are boring, with the path of least resistance in values seemingly lower. However, over the last couple of weeks I have started to notice some remarkably interesting developments in both the Brazilian and Chinese cash markets. Signs that perhaps the storyline isn’t quite what it seems, with actual developments in basis, freight and demand structure potentially opening the door for some interesting market moves in the weeks ahead.
Brazil Cash Market
As harvest reaches the midway point across Brazil, wrapping up in the country’s largest producing states, there are some interesting developments taking place.
Typically, the last half of harvest brings with it rising freight costs, falling basis values and a lack of space that results in an increase in available supplies. We saw this a year ago in Brazil as their export lineup started to grow, basis values fell to new lows each week and freight spiked.
The current market structure in Brazil has had my attention for the last month though because we have been seeing almost the opposite of what should be taking place.
According to Agrinvest, a Brazilian cash brokerage and analytical group, working with hundreds of farmers and traders across Brazil, basis values have been firming, freight has been falling, with elevators across Mato Grosso and other parts of the country talking about drops in inbound shipments of over 20% compared to a year ago.
Talk that the amount of beans being offered into the export market is falling off precipitously as crushers push to get ownership has my attention as well. In a way, this is where I feel confused, as the values being offered into the world market remain relatively cheap, undercutting US values by more than a dollar. At the same time though, I think this may be more of a function of betting on the come by exporters, with them having expected a larger flow of beans into the pipeline than has been seen.
While the country’s short-term export outlook may be falling off, their domestic demand appears to be heating up. The increase is being driven by growth in demand for biofuels, with the country’s biodiesel blend rate growing to 14% from 12% at the start of the month. According to industry leaders, the increase in blend rate results in nearly 500 million gallons of additional soy oil demand. On top of the increase in blend rate, the country is studying whether biofuel imports are harmful to the domestic market, restricting imports in the meantime.
Chinese Demand
At the same time, we are watching the push of beans into the Brazilian export market slow, we are starting to see signs demand could be on the rebound in China.
After a big push to import record volumes at the end of the 2023 calendar year, the poor start on imports in 2024, with volume down 8% from a year ago in January and February should not be surprising. Poor margins in both the hog and crush industries have been weighing heavily on trader sentiment as well, with thoughts we will need to see more cuts in the hog herd to stabilize that market.
However, one of the biggest takeaways from this week’s National People’s Congress appears to be that the country’s officials not only want to incentivize domestic food production, but they also want to incentivize domestic demand for food, with one analyst saying the week’s theme was “Eat, Drink, Play.”
An increase to the government’s budget and reserve targets was seen as well, with ideas that government buyers will soon return to the world market for supplies as a hedge against any type of Northern Hemisphere production issue or a potential second round of trade disputes after the election.
The volume of sales of meal at Chinese ports has spiked over the last week, coming in over four times that of the previous two week volume. While at first the increase in sales was thought to be brokers in the deferred looking to lock up historically cheap supplies, we are now seeing a spike in spot market demand as well, showing end users are getting involved.
The drop in the flat price of soybeans is making for cheap meal, leading to an increase in inclusion rates in the poultry industry as well, as meal values undercut distiller’s grains, canola, and corn.
As is usually the case, low prices cure low prices by discouraging production and incentivizing demand. Keeping in mind how violently cyclical the hog sector can be in China, there are signs we could see significant recovery in margins in the last half of the year.
Argentina
As has been the case for the last couple of months, any bullish talk in the soybean market can be easily silenced by pointing out the year over year growth in Argentina production. Last year’s epic drought had cut Argentina production in half, decimating the country’s crush industry, and cutting the amount of revenue the government was able to generate through exports.
The recovery in production this year is welcome, but I feel like we must be careful assuming those beans flow easily into the market, especially into the export pipeline. One of the most important rules in cash markets is the pipeline never tends to fill up as quickly as expected, and I anticipate this will be the case this year in Argentina.
While the harvest of the much larger crop is set to begin in a handful of weeks, it is likely we will see the country’s crushers work the hardest to fill their space, this after the farmer and local elevator fill their empty bins first.
The convergence between Argentina’s official and unofficial exchange rate seen over the last few weeks should help to increase farmer movement, with reasonable new crop sales seen. However, with uncertainty over what is going to happen in the economy as Milei continues to work on reforms, Argentina farmers will likely look to hold tightly to supplies as a hedge against inflation.
Planting Intentions
You can argue that soybeans show more potential for profitability on paper until you are blue in the face and the farmer in the heart of the Corn Belt will still lean towards planting corn.
You see, the potential to out-yield your production history in corn is significantly greater than what you see in soybeans. A good soybean year and a great soybean year yield-wise are just too close compared to what a really great year in corn can mean.
I’m not saying we will see a significant cut from the acreage projection provided by the USDA late last month, but to see a million or two less than expected wouldn’t surprise me in the least. The USDA will wrap up their acreage survey in the coming weeks, one that was compiled while the farmer was looking at losses no matter what they choose to grow, and one that is likely to show less enthusiasm to plant fence row to fence row than we’ve seen the last couple of years. In The End
I’m not saying we are set to head to new record highs by any means, but the situation in the world soybean market will hold my attention in a big way over the next several weeks.
While the supply and demand fundamentals may be as they are on paper, how we get to the end result is never guaranteed to be smooth, with the next few weeks poised to highlight what mismatched grain flow can mean in cash.
As always, let me know if you have any questions! Have a great week.
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
