Farm Futures - Weekly Market Recap

Weekly Market Recap
Bryce Knorr, Farm Futures senior editor
July 31, 2015

Nothing says summer like a good, old-fashioned squeeze in the soybean market.

To be sure, the fireworks this year pale compared to the last couple seasons, when drought and record tight supplies roiled markets as the marketing years wound down. But earlier in 2015 few would have believed any talk of a squeeze was possible.

Back in January USDA said leftover supplies on Aug. 31 would hit 410 million bushels. Yet in its most recent forecast the agency put carryout at only 250 million bushels. And, there's a real possibility it could be even lower.

One cause for the tightening comes from demand. Both crush and exports turned out better than USDA expected. That's not unusual, but the twin pillars of usage were a combined 105 million bushels better than January's budget.

This demand could turn out to be even stronger when all is said and done. Crush margins remain very attractive, with consistent domestic consumption supported by record exports. Whole soybean exports were slowing down seasonally until China stepped back into the market for old crop soybeans recently. Crush margins at Chinese processors had been falling, but strengthened enough to convince some to start buying again, though others were cancelling purchases too.

Lurking in the background is a very large estimate for what the government calls residual usage. This is category the agency uses to balance its books when the numbers don't add up. This year residual usage is up to 82 million bushels based on quarterly stocks data that consistent ran smaller than expected. This likely means the 2014 crop was significantly smaller that the agency's January estimate of a record 3.969 billion bushel crop.

Farmers sold most of their old crop soybeans earlier, but appear to be holding fast now. That forced some processors in the eastern Midwest to begin hauling in soybeans from the western part of the growing region to meet demand. Strong basis in the cash market in turn triggered bull spread, as merchandisers covered risk by buying August and selling deferreds. That took the August contract to a new premium for the year over September as it went into delivery July 31.

The excitement was a prelude to what's likely to be the main event for the summer, USDA's Aug. 12 production estimate. This tally features the agency's first survey of farmers and their fields; previous yield estimates came from statistical models. Pegging soybean yields this early in the growing season is always perilous. But this year even more uncertainty makes traders nervous. Crop ratings suggest potential for good yields, around 46 bushels per acre nationwide. But record June rains in some areas may mean several million acres went unplanted or won't be harvested. That could knock 100 million bushels off the crop. Coupled with tighter old crop stocks it could be enough to make the market very sensitive to any weather hiccups as pods fill.

Corn prices suffered in July along with other commodities. December futures ended the month 12% lower, 70 cents off the mid-month high. Better weather stabilized crop ratings, which suggest above average yields are possible. Yet if farmers were prevented from planting significant acreage it could limit production increases. A crop of 13.7 to 13.8 billion bushels still looks likely, enough to meet most of the demand.

Usage at ethanol plants looks stable and expanding livestock herds should chew through more bushels in the coming year. But export demand is shaky at best. New crop bookings this summer are at four-year lows, in part because cheap Brazilian corn is flooding the world market.  End users also can choose from an abundance of cheap feed wheat coming out of the Black Sea. The Russian winter wheat harvest is winding down with very good results, and some Asian buyers are shifting plans from the U.S. to take advantage of these deals.

Futures will try to consolidate losses ahead of the Aug. 12 USDA reports as traders take profits on short positions and move to the sidelines. Still, a measuring gap on the December chart projects down to $3.47, a tick off the mid-June low on the nearby chart.

Soybeans lost more ground at the end of July, after USDA reported China cancelled a previous purchase of 7.35 million bushels of old crop. This type of cancellation is not unusual toward the end of the marketing year. An average of 65 million bushels of sales are cancelled outright or rolled to new crop at the end of the marketing year. The U.S. has already sold or shipped 3% more soybeans than USDA projects for exports during the entire marketing year, so more givebacks are likely in August.

Still, November soybeans lost nearly a dollar of the rally, finishing the month almost 10% lower. Futures never really got to profitable levels for most growers, making August crucial for pre-harvest hopes.

Wheat prices languished in July due to lack of bullish news. The annual spring wheat tour forecast record hard red spring wheat yields, helping hard wheat futures make new contract lows.

Still, export hopes turned a little brighter after a slow start to the selling season. Spring wheat export sales improved this summer because buyers needing higher protein levels fear shortages out of Canada in the coming year. Drought appears to have slashed production on the Prairie provinces. Overall export sales finally started to pick up too, with USDA announcing the sale of another 4.7 million bushels to unknown destinations at the end of the month.

Seasonal trend charts favor a turnaround in August. But without a rally in corn or soybeans, or production problems around the world, big rallies are unlikely this fall. Hard wheat futures offer five-cent a month carry into spring and early summer, enough to make hedging rallies worthwhile.

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