Soybean Prices - "Egg On Our Faces?"

Contrary to the lower prices most market analysts have projected, soybean prices have rallied more than $1.70 per bushel in the last six weeks. Corn and wheat prices also have increased. Supply and demand factors really haven’t changed that much. While corn and soybean demand is strong, record 2004 production is expected to exceed use. Domestic corn carryover is expected to double and soybean ending stocks are projected to increase from the smallest in 27 years to the largest in 18 years! World supplies also are large. World ending corn stocks are projected to increase, primarily due to large U.S. supplies. World supplies of wheat and other coarse grains are on the rise. Although dry weather has reduced crop potential in Brazil, they are expected to produce a record soybean crop and world soybean ending supplies will swell to record levels. However, in spite of what is expected to be burdensome world soybean carryover (almost equal to Brazil’s production), soybean prices have risen sharply - pulling other grain prices higher.

It’s very difficult to explain the higher prices in terms of supply and demand. Normally, when supplies are large, lower prices are necessary to encourage demand in order to "use up" the large supplies. With large carryover supplies, there is no need to ration grain or oilseed uses with higher prices and market analysts generally agree that the current supply/demand numbers do not support the current price rallies. Yet, prices have surged higher. Are market analysts all wrong? Do we have egg on our faces?"

While most analysts are surprised and perplexed by the market rally, everyone is searching for answers to explain the sharp price moves and how to react to unexpectedly higher prices. Some of the contributing factors are:

• Dry weather in Brazil is reducing the South American crop. USDA again lowered the production projections in the March supply/demand reports, to 59 mmt. This is significantly reduced from the January estimate of 64.5 mmt, but remains much larger than last year’s Brazilian production of 53.9 mmt. Argentine soybean production also will increase.
• Concerns about 2005 U.S. soybean production. Soybean rust, aphids, reduced acreage, and potential for weather problems could reduce soybean production during the upcoming growing season. But these worries seem premature.
• The market is bidding for soybean acres. The new crop soybean/corn price ratio is 2.6/1, suggesting the market is worried about acreage reductions and wants more soybeans planted in 2005. However, soybean supplies are already large, why "bid" for more?
• Export demand is strong and Chinese buying has continued, even as South American supplies are coming available. This is true, but strong export demand has been anticipated.
• The declining value of the dollar makes U.S. soybean prices cheaper for the rest of the world. Some of this weaker dollar advantage is offset by high shipping rates and Chinese crush margins are weak, suggesting they will slow purchases.
• Technical trading by large speculators. Commodity fund investors were heavily short in the markets (sold futures expecting lower prices) a few weeks ago. They began taking profits and liquidating these positions with buying of futures. This buying or "short covering" began to bid up prices and triggered technical or chart signals that encouraged more liquidation and buying. The rally "picked up steam," producing even more positive technical signals and the speculators began to take long positions (buying futures in anticipation of higher prices). Keep in mind that similar market action and technical signals could accelerate declining prices if the market reverses.
• Grain and oilseed prices are "cheap" compared with other commodities. This is one of the more popular explanations given. The CRB (Commodity Research Bureau) Index of commodities is the highest in more than 20 years. This index includes energies (oil, gasoline, etc.), precious metals, industrial commodities, coffee, orange juice, sugar, livestock, meats, and other commodities as well as grain and oilseeds. Investment money has been flowing into the other commodities. Prices for most of the CRB Index commodities have been in uptrends and many are in the top onehalf of their historical price ranges. Compared with these other commodities, grain and oilseed prices did appear under priced and some have suggested prices are moving to a new higher price plateau as all commodity prices inflate. However, it can be argued that supply/demand factors provide more support to some of the other commodities than they do for grains and oilseeds.

The bottom line? The markets are likely offering an unexpected selling opportunity. The price rally appears to have more to do with large amounts of money flowing into the grain/oilseeds markets rather than current supply and demand factors. Market fundamentals remain negative and this is supported somewhat by weaker cash basis as futures prices have surged higher. It is a volatile and unpredictable market, resulting in significant price risk because supply /demand factors now suggest grain/oilseeds are over priced at current levels. Remember, supply and demand ultimately determines price and "what goes up also comes down." What is unknown is how high will prices go or how quickly will they fall.

"Pigs Get Slaughtered" In Volatile Markets

There is an old market adage that says, "Bulls get something, bears get something, and pigs get slaughtered!" Volatile markets usually create opportunities for both buyers and sellers of commodities. However, those who remain inflexible in their marketing or are greedy in their expectations of winning big often end up losing big or "getting slaughtered" financially. This includes producers who avoid marketing decisions or delay sales in bull markets, waiting to see where prices go. How do you market grain in volatile markets and avoid getting slaughtered?

While the recent soybean price rally seems surprising, as a late winter or early spring rally it is right "ontrack" as corn and soybean prices often begin a rally at this time of year. The soybean price move is just a lot stronger than most anticipated and has created unexpected pricing opportunities. The sharp uptrend in soybean prices has "blown through" many upside price targets that just a few weeks ago seemed very optimistic. Soybean prices have moved to levels that offer profitable returns, but will they go higher? This makes selling decisions difficult, especially if you have already made sales earlier in the rally and are now disappointed in these sales. How do you adjust marketing to deal with the unexpected upturn in prices?

Always spread sales. Even with the "best available" knowledge, markets are not always predictable. Spreading sales insures that, while not everything is sold near the high, all of your grain isn’t sold near the market lows. Although earlier sales may be disappointing now, supply/demand fundamentals suggest they may not eventually be all that bad. Regardless, those sales have been made and market focus needs to be on making the next sales, not on those that are already complete. Continuing to make incremental sales or scaling up of sales as prices continue to rally is one method of capturing prices in an uptrend. Technical market signals, such as resistance prices, can be used to target these sales. You may never capture the market high, if the market reverses before your last upside target is hit. However, as long as the uptrend continues and more and more sales are made, the average price received continues to increase.

Another sales method is using downside price targets or "price traps." The objective is to avoid selling too quickly, follow uptrending prices higher, and capture higher prices when the market reverses. This is accomplished by setting price traps just below current prices and then continuing to raise these price traps, keeping them below current prices, as the market continues to rally. When the market reverses and prices start to decline, the price trap is triggered and sales are made near the high. Technical signals, such as support prices or broken uptrends can be used to establish price trap objectives. While it can be effective and may sound relatively simple, it is not necessarily easy to do. It requires following the market closely to set increasingly higher trap price objectives and reacting quickly with sales. It may be difficult to react quickly enough in volatile markets as rapidly falling prices may trigger sales significantly below the hoped for trap price. It also can be frustrating when price traps are triggered by market corrections and then the market again moves higher. Although it attempts to follow prices higher, this strategy does not capture the highest price and it takes discipline to make sales when prices fall, which is what occurs to trigger the price trap.

The markets are providing some surprises with much higher than previously expected prices. Do not let greed or indecision keep you from making sound marketing decisions. It is important to be prepared to take advantage of pricing opportunities as they are offered. Understand, the strategies outlined above are not perfect, nor are they necessarily easy, and there are always risks in setting price targets in volatile markets. However, spreading sales based on upside price targets or using trap prices can help capture profitable prices and maybe avoid becoming the "pig that gets slaughtered" in the markets.