Soybeans, What’s Going On?

As the month began, many market analysts were anticipating a "February low" in soybean prices. These lower price expectations were supported by negative market fundamentals (supply and demand factors) that suggested the potential for lower soybean prices. Soybean futures prices did slip below $5 on February 4, and then rallied for 6 consecutive days. After pausing for a couple of days, soybeans again closed sharply higher. This rally has produced market signals indicating a possible price low and the potential for additional price gains. What is going on?

USDA’s February 9, 2005 supply/demand reports really didn’t change soybean outlook. Domestic and world soybean supplies are increasing. The U.S. 2004 soybean crop was record large and South American production also is expected to set a new record. Demand for U.S. soybeans is expected to be good, but not a record. Soybean supplies are more than adequate and domestic soybean ending stocks are expected to nearly quadruple. Although world soybean demand is projected to increase, it is anticipated that the record U.S. and South American production will swell world soybean carryover to record levels. Additionally, FAPRI and USDA supply and demand baseline projections suggest large supplies will continue to pressure prices for 2004 and 2005 soybean crops. Even with a somewhat smaller U.S. planted acreage, expected production using trendline yields will provide more than ample soybean supplies. This results in continued burdensome ending stocks and price projections pointing to soybean prices in the mid $4 range. Some private analysts have suggested prices could drop to the low $4 or upper $3 ranges.

If supply and demand factors are so negative, what caused soybean prices to rally? A positive market reaction to negative news sometimes signals a market "turn around." In spite of the large production estimates and expected burdensome carryovers, a number of factors are creating some uncertainty or providing support to soybean prices. Does this rally signal a market turn around?

As the 2004 U.S. soybean harvest began, the soybean "pipeline" was nearly empty (due to the short 2003 crop) and there was considerable pent up crush demand. Slow producer sales and strong export sales kept available supplies relatively tight. The crush and export demand bid up nearby futures and cash prices, producing an inverted market (nearby month futures prices higher than prices for distant months) and strong basis in some areas. This strong cash demand and slow soybean movement has continued to support soybean prices into the winter months.

Expecting large soybean carryover supplies and lower prices, large speculators (investment funds) accumulated very large short positions (sold futures contracts, speculating on lower prices). At some point these speculators will liquidate these short positions to take profits (or to avoid losses). They do this through buying of futures contracts to offset the earlier sales. This buying can bid up prices and produce what is referred to as a "short covering rally." Buying by the large speculators to offset some of their short positions or "short covering" is among the reasons for recent soybean price strength.

Although short covering or profit taking by the funds can explain part of the recent higher prices, other factors may be making these large speculators uneasy holding large short positions. Dry weather appears to be trimming South American production. Most expect fewer U.S. soybean acres in 2005 and some are concerned about the possible impact of soybean rust. Some entomologists have pointed out that soybean aphid damage may be greater this year. A few long range weather forecasts suggest an increased potential for dry weather in the Midwest this summer. These concerns could add fuel to a short covering rally.

In spite of the recent price rally and some early concerns about 2005 production, the situation for soybeans really has not changed. Large carryover supplies and more than adequate expected production are still expected to provide more soybeans than even strong demand can consume. Although the rally occurred in the face of continued negative USDA supply and demand news, large soybean supplies suggest that it does not necessarily signal a market turn around and considerable downside price risk remains for soybeans. It is hard to argue against higher prices or market signals, but fundamentals suggest price rallies probably should be viewed as pricing opportunities rather than as a sign of much higher prices.

Where to Begin New Crop Sales?

FAPRI and USDA baseline projections, along with several estimates by private analysts, suggest average 2005 corn crop prices of $2.00 to $2.15 and $4.50 to $4.72 for soybeans. These estimates are based on assumptions using trendline yields and continued strong demand, resulting in the continued relatively high levels of corn and soybean ending stocks. Although many factors can alter these projections (weather, acreage, yields, use, etc.), they provide a starting point for market planning.

Current new crop corn and soybean futures prices translate into fall cash prices near or below CCC loan price. At these price levels, the LDP provides downside price protection, assuming current program provisions with none of the proposed budget modifications. These currently available new crop prices could be enhanced with a large LDP if prices decline. However, with steady or higher prices, selling at current prices only protects prices at about loan price and the LDP already does that. Most producers probably would prefer to target sales at higher prices. New crop corn and soybean prices often offer that opportunity by rallying into the planting seasons with spring highs typically occurring in March or April for corn and April or May for soybeans.

Technical analysis may be useful for setting price goals for some initial new crops sales to be made on spring price rallies. Technical analysis involves use of price charts to study price action and identify price patterns. Among the many technical analysis patterns is the use of resistance prices that can be identified by previous market highs. These represent prices that the market achieved previously and then turned back or "resisted" going higher. These resistance prices are often used as price targets by market traders for a variety of buying or selling decisions.

If December 2005 corn futures prices rally above resistance at $2.40, earlier highs occurring last November of $2.47 may represent a reasonable target for initial new crop sales. If USDA’s March 31, 2005 Prospective Plantings report indicates more than 82 million planted acres for corn, $2.40 may be considered as a stop or trap price. Spring or summer weather scares might offer a chance at previous highs near $2.66 or higher, occurring last September.

If a spring rally pushes November 2005 soybean futures to near November or December highs of $5.95 or $5.75, these prices represent initial targets to consider for early sales that are well above projected new crop average prices. It will likely take weather scares or rust concerns to push prices to higher resistance at last September’s highs of $6.25.

Historically, early spring sales have offered favorable prices when compared to fall cash bids available at harvest time. These technical price objectives offer possible targets for initial sales. Understand, while the market outlook is bearish, the unexpected can and does happen. Concerns about insects, crop disease and drought are already being raised. Market plans should include spreading of sales and flexibility to deal with changing market situations. Options strategies and crop insurance protection may add to confidence in making these early sales.