Focusing on Soy Seasonality
New-crop November soybean prices have slumped 8 percent since the first of March. While not as severe a drop as corn’s 15 percent slide, it does not help farmers struggling with a challenging price environment. Late last week, there were some positive signs as China acquired 300,000 MT of U.S. soybeans for late summer shipment. But on Monday, the soybean market gave back much of those gains from the previous week after the U.S. continued to blame China for covering up the COVID-19 crisis. Even another 378,000 MT Chinese purchase on Tuesday didn’t help, as November futures hovered around life of contract lows at $8.40.
On Tuesday, May 12, USDA will release their first supply and demand estimates for the 2020 crop year. In their February Ag Outlook Forum meeting, USDA economists pointed to a 2020 soybean balance sheet that was more friendly than the 2019 mark, as carryout was expected to go from 425 MBU in 2019 to 325 MBU in 2020. Although the 2019 carryout estimate is now higher at 480 MBU due to sluggish exports, the March Planting Intentions report also showed lighter bean plantings at 83.5 million acres than the 85 million acre forecast USDA had back in February.
With that acreage figure and normal yields, penciled-in production for USDA should be somewhere around 4 billion bushels. Soy crush estimates are usually fairly stable, and will likely be 20 MBU to 40 MBU higher than the 2019 estimate, so that would put the 2020 annual crush at 2,150 MBU. Another 100 MBU is usually tacked on for seed and residual. The wildcard becomes exports. Old-crop 2019 exports have faltered of late and could end up being below 1,600 MBU on lack of Chinese buying after the trade deal was signed in January, opting instead for their typical seasonal play of Brazil beans. But with the U.S. likely better positioned into the fall and winter, Chinese interests should turn back to the U.S. FBN would expect USDA to land somewhere in the 1,900 MBU to 2,100 MBU mark for their export forecast in May. Even at the lower end, that would imply a total usage of 4,150 MBU, and a 4,000 MBU crop would suggest stocks are heading lower versus 2019.
If that is what is in store for the coming crop year, what does that suggest about the likely price trajectory for the coming growing season? Is there a decent chance of a “summer weather rally,” and how does the upside versus downside risk potential look?
To explore these issues, we examined data on November soybean futures for the growing season from March prior to planting up until harvest in October. We looked at daily closing prices during this period covering the crop years 1990-2019, giving us 30 years of data. In addition to futures prices, we want to understand how early-season reports on new-crop stocks and how those metrics compare to the old-crop situation. Throughout this article, we will refer to the stocks difference between new-crop (NC) as of the first report in May and the same reading on the old-crop (OC) balance sheet in May relative to total use. For this year, we expected the stocks-to-use percentage to go from about 18 percent in 2019 to around 12 percent in 2020, or a -6 percent change.
Can we expect a summer rally with growing stocks?
We take the same data we discussed above, but now want to gain a better understanding of seasonality. To better illuminate possible trends based on stock differences between NC and OC, we partition the data into three buckets:
(1) Years when stocks are declining. These years are averaged together in the left pane of the below chart. Not surprisingly, in years when we see NC supplies expected to fall, the new-crop soy prices build a weather premium into summer. This is the situation FBN believes will be valid for 2020.
(2) Years when stocks are increasing. On average in these years of building stocks, the long-run average seldom barely exceeds the early-season price in March.
(3) Years with no significant change. This is illustrated in the middle pane. This also exhibits similar seasonality as years when stocks are increasing, although the upside potential seems more favorable in early summer versus years when stocks are clearly building.
What this means for the U.S. farmer
Odds favor better opportunities for soybeans this year if the carryout shrinks in Tuesday’s USDA report. Falling new-crop stocks relative to old-crop stocks tend to be associated with higher summertime prices as compared to the spring. This year, however, a critical development will be the buying behavior of China. Any hint that China is not going to buy sizable soy volumes for 2020 could limit the upside.
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