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Newsom on the Market
Darin Newsom 1/19 6:25 AM
Now that USDA's January reports have come and gone, what do the tea leaves say about the future of soybeans? Recall in last week's column, the pieces were there to put together a rudimentary supply and demand table for the last three-quarters (roughly) of corn's 2017-18 marketing year, a table that resulted in an ending stocks figure of 2.663 billion bushels (bb) and ending stocks-to-to-use of 18.6%.
Based on the previous 10 marketing years, this would create a situation where the average cash price (daily average of the DTN National Corn Index) comes in at $2.40, with a range of $2.70-to-$1.95. Is the same sort of analysis possible with soybeans? Let's find out.
The answer, honestly, is no. Again, going back to the previous piece on corn, Q1 usage (total supplies minus stocks on hand as of December 1) amounts to a consistent 31% (using both 11-year and 4-year averages) of what total demand ultimately turns out to be in the final quarterly report for stocks on hand as of September 1.
Looking at averages for soybeans, 20-year Q1 usage amounts to 33% of what total demand becomes. USDA pegged U.S. soybean stocks on hand as of December 1 at 3.157 bb. While some analysts and reporters will focus on that being a record large stocks figure for Q1, the more important point is that, given total supplies calculated at 4.718 bb, first quarter usage was 1.561 bb. If the 20-year average can be used as a guide, total demand would be expected to ultimately come in at 4.693 bb. If we subtract that expected total demand from USDA's January total supply figure of 4.718 bb, complete with a new high record "final" production number of 4.392 bb, ending stocks for 2017-2018 would be 25 mb. Isn't that incredible?
Maybe too much so, for a closer look at the trend of Q1 usage shows something far more bearish. If we narrow our focus to only the last three crop years, bound together as the only set of crop years with total supplies over 4.0 bb, we see Q1 usage amounts to 38% of what total demand turns out to be in the September Quarterly Stocks report. Using this three-year average, 38%, projects total demand of 4.106 bb. Subtracting this from USDA's January total supplies figure (4.718 bb) creates ending stocks of 612 mb with ending stocks-to-use of 14.9%. Compare that to the 2016-17 final figures of 301 mb and 7.2%, respectively, and the increased bearishness, fundamentally, becomes obvious.
A look at USDA's January Supply and Demand table shows the government calculated total 2017-18 demand at 4.248 bb, 142 mb greater than what my analysis of the previous three years shows. Who might be closer to right will depend a great deal on what happens with exports over the next 8 1/2 months.
This week's export shipment numbers, for the week ended Thursday, January 11, showed total U.S. soybean shipments of approximately 1.140 bb. Again, using the three-year average, soybean shipments through this point of the marketing year amount to roughly 59% of eventual total exports. Using this, my analysis would project total export demand at 1.932 bb as compared to USDA's latest estimate of 2.160 bb. More importantly, my latest number is approximately 200 mb below USDA's final reported (according to its own weekly reports, not its supply and demand table showing 2.174 bb for 2016-17) exports of 2.135 bb for 2016-17.
If my expected export demand is 200 mb less than USDA's, yet my projected ending stocks figure for 2017-18 is "only" 140 mb (or so), where does the other 60 mb go? With seed demand already increased to 106 mb, from last year's 105 mb, the most logical demand category to see a substantial increase could be crush. USDA estimated this at 1.95 bb for its January table, up from the previous year's 1.900 bb. Given continued increases seen in monthly Cattle on Feed reports, this type of increase is possible, though still somewhat extraordinary. If the latter, the focus would turn again to exports possibly coming in higher than I'm projecting at this time.
Wait a minute, how is it possible U.S. soybean exports could come in larger than my current projections? Last marketing year, total Chinese imports supposedly were 93.5 million metric tons (mmt) with the January WASDE showing a projected increase to 97 mmt during the 2017-18 marketing year. Reportedly during 2016-17 the U.S. exported 59.2 mmt, roughly 48% of its total supplies, while Brazil supposedly shipped 63.1 mmt, interestingly enough also 48% of its total supplies. If similar patterns are seen over the course of 2017-18, U.S. exports would theoretically come in at 61.8 mmt, or 2.6 mmt more than the previous year. While Brazil's final production number isn't known yet, the January WASDE guessed it to be 110 mmt, Brazilian exports could climb 1.2 mmt (marketing year-to-marketing year) to 64.3 mmt. And, if you do the math, these estimated increases would offset projected increases in Chinese imports.
Admittedly, that's a lot of numbers; and here in the good ol' US of A we talk bushels instead of metric tons. What do those extra mmts of exports mean for U.S. demand? The 61.8 mmt shown above amounts to 2.27 bb, roughly 350 mb more than what the current pace of exports would project. When all is said and done, if any of this plays out as the math shows it could, then U.S. ending stocks could once again be in that 300 mb range, with ending stocks-to-use near 7%. My concern as to why U.S. exports will not come in higher than expected is simple: The looming trade war DTN's Todd Hultman discussed in his latest column ("For US Soybean Growers, Trade War is Here" http://bit.ly/…). That was my immediate reaction a couple weeks ago when China announced a crackdown on U.S. soybean quality, standards that won't be applied to Brazilian supplies.
Are you thoroughly confused at this point? If so, you are in fine company. The market doesn't know what to make of all this either. Trends on weekly and monthly charts for both futures and the DTN National Soybean Index (NSI, national average cash price) show consolidation patterns between converging trendlines. In other words, futures and cash are poised for a breakout with direction likely a function of demand in general, exports in particular. At this time it's just too early to tell.
What might all this mean for new crop? As mentioned above, seed demand is expected to increase slightly during 2017-18, hinting at a larger planted area this spring. Seasonally new-crop November futures tend to post an initial low weekly close the second week of January (last week), moving into an uptrend that gains an average of 6% through the close the first week of June. If the low week close of $9.73 (week of November 18) was actually the initial seasonal low, the Nov 18 soybean contract would be projected to post a high weekly close near $10.30.
Fundamentally, will this be possible if USDA shows a larger than expected year-to-year increase in acreage in its Prospective Plantings report in late March? What if old-crop ending stocks (new-crop beginning stocks) start showing normal decreases in USDA's monthly reports? Or a contra-seasonal increase in USDA's ending stocks guesses? Finally, from a technical point of view, can November soybeans actually post a new contract high beyond its current $10.28 3/4 (week of July 10, 2017)? Stay tuned, the market will sort all this out over the rest of year.
Darin Newsom can be reached at firstname.lastname@example.org
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