Smaller Brazilian Soybean Crop Likely Not Baked into Prices
Teucrium | December 4, 2020
Market participants seem to be at odds over whether the soybean market has already priced in significant production challenges in Brazil. We do not think so.
We believe that soybean futures prices accurately reflect the USDA current forecast of 133 million metric tons (MMT) of Brazilian production. A reduction in Brazilian production estimates would likely provide additional support for soybean prices.
Granted, November was a big month for soybeans as futures prices rose across the curve. The January 2021 contract reached an intra-day high of $12.00 a bushel which has proven to be a near term resistance level. The front month soybean futures contract has not closed above $12.00 per bushel since 2014.
The recent rally in soybean prices appear to be justified by a shrinking global balance sheet resulting largely from historic Chinese demand. In fact, the global balance sheet is expected to remain tight even if Brazil meets current USDA projections and produces 133 MMT of soybeans in the ’20-’21, which means soybean prices will likely continue to be drive by demand in the current crop year.
Regular readers may have anticipated and hopefully participated, in the soybean rally this year. We noted in our May 15th commentary that the US soybean balance sheet was tightening in a large part due to Chinese purchases (China Buys Soy Amid Tensions). In August, we noted that there may be an attractive investment opportunity in the grain complex and that soybeans might lead the way. Again we highlighted the tightening US balance sheet, in a large part driven by Chinese purchases (An Investment Opportunity in Grains, Soybeans May Be Poised To Lead The Way).
One cannot overemphasize the importance of Chinese purchases which contributed to the USDA increasing the ’20 – ’21 export estimates by 31% versus the ’19 – ’20 crop year. The market has reacted accordingly pushing prices up to near 6-year highs. The rally which up until this point has been driven by demand, may find new legs on any further supply concerns.
Many in the trade now believe that Brazilian soybean production will be a key driver for prices moving forward. If Brazilian production estimates come in below market expectations, prices could continue moving higher. We touched on this in October (Soybean Supplies Dwindling) noting that Brazil’s record expected production of 133 million metric tons was already reflected in the global balance sheet. Since then, a lack of rain in Brazil has led to planting delays which has given way to growing expectations that Brazil’s production may fall short of the USDA estimates.
Certainly, the trade is aware of the planting troubles and is watching the weather closely, but our analysis leads us to believe that prices are not yet reflecting a smaller Brazilian crop. Importantly this suggests that there would likely be upward pressure on soybean prices if Brazilian production comes in lower than expected.
Price analysis is an imperfect science. Forecasters are constantly analyzing data for indicators to help make predictions about the future. Past performance and price moves are not necessarily indicative of future results.
While many factors contribute to the pricing of a commodity, fundamentally prices are grounded in the basic principles of supply and demand. Soybeans are no exception. One quick way to observe supply relative to demand is to look at the Stocks to Use Ratio. The Stocks/Use Ratio compares Ending Stocks (beginning stocks + production – total usage) to Total Usage. A higher number indicates a larger supply relative to demand while a lower number indicates a smaller supply relative to demand. A balance sheet is said to be tightening when the Stocks/Use Ratio is falling.
A tightening balance sheet is seen as being supportive for prices. Chart 1 below depicts this relationship well, showing the front month US soybeans futures contract price relative to the global soybean Stocks/Use Ratio[1]. This annual chart displays values as of 12/31 for a given year except for the beginning date of 09/01/2009 and the end date of 11/30/2020.
Chart Created by Teucrium Using Bloomberg Finance LP on 12/03/2020
Front Month Soybean Futures Price vs. Global Soybean Stocks/Use Ratio
Yearly Chart 09/01/2009 – 11/30/2020
Past performance is not indicative of future results
The annual chart above smooths the lines to remove the noise of constantly changing estimates.[2] We believe that the annual data more accurately reflects the primary trend. Chart 2 below is a monthly chart which captures the variability of the USDA’s estimates. Note that in 2016, soybean prices jumped as the estimated global Stocks/Use Ratio put in a 10-year low. This occurred as the USDA reduced the US soybean ending stock estimate by 45 million bushels down to 260 million bushels. By December 2016, the USDA raised their ending stocks estimate by 220 million bushels to 480 million bushels[3]. The important point here is that USDA projections, estimates, and what some might call “guesses” are liable to change, and often do.
Chart Created by Teucrium Using Bloomberg Finance LP on 12/03/2020
Front Month Soybean Futures Price vs. Global Soybean Stocks/Use Ratio
Monthly Chart 09/01/2009 – 11/30/2020
Past performance is not indicative of future results
Both the yearly and monthly charts above show that currently the global soybean Stock/Use Ratio is near 10-year lows.
Another way to view the data is through the lens of a crop year, which for soybeans begins September 1st and ends August 31st. The table below looks at soybean Stocks/Use Ratio on Global, US and Brazilian balance sheets going back to the ’09-’10 crop year. Included is the USDA estimated US “Farm Price” per bushel, which is the average price farmers are expected to sell their soybean bushels for in a given crop year. There is a heat map overlay so that the darker shaded greens reflect higher values, and lighter shade green is a lower value.[4]
Source: Teucrium Trading LLC, and USDA World Agricultural Supply and Demand Estimate (WASDE) Report – Latest data from the WASDE Report released November 10, 2020
Combined, the US and Brazil make up approximately 2/3rds of global soybean production and both countries Stock/Use Ratios are near 10-year lows. In our opinion, the current price of soybeans accurately reflects the reality of current estimates.
For further evidence that the trade has not factored in lower Brazilian production, consider a scenario where the expected Brazilian crop estimate is reduced by 10%. Assuming no change in the usage estimates, the result would be a global Stocks/Use Ratio of 19.84%. That would be a 10 year low on the global balance sheet compared to a seven year low currently! In that scenario, one might expect US soybean prices to also reach, if not exceed, the 10 year high of approximately $18 per bushel.
To summarize, near term Soybeans appear to be fairly valued at current levels. We believe prices may see continued support if usage estimates are realized and Brazilian production comes in lower than estimated. To be certain, larger than expected Brazilian production (i.e. anything north of 133 MMT) would likely have a negative impact on prices.
Looking out further still, in the intermediate term we will be watching to see whether farmers decide to plant more soybean or corn acres in ’21. That acreage battle is likely to have an impact on prices for both commodities. Stay tuned.
[1] This annual chart displays values as of 12/31 for a given year except for the beginning date of 09/01/2009 and the end date of 11/30/2020.
[2] Stocks/Use Ratios are based on USDA estimates which can be found in the monthly World Agriculture Supply and Demand Estimate (WASDE) report.
[3]The majority of US soybeans are typically planted by the 3rd week of June. The projected acreage numbers in the June WASDE are based on the prospective acreage report from March. The USDA’s harvested acreage estimate in June was 81.4 million and by the December WASDE that estimate was up to 83 million acres.
[4] Notes on the Table: If realized, the global Stocks/Use Ratio of 23.45% would be the first time the market has seen a 23 handle since the ’13-’14 crop year.
The US soybean Stocks/Use Ratio is reflecting a low estimated of 4.20% a level not seen since ’14 –’15. This puts the US Stocks/Use Ratio in striking distance of the 10 year low of 2.65%.
Brazil’s Stock/Use Ratio estimate is 15.48%, the second lowest in the last 10 years, second only to last year’s ratio of 14.63%.