If the choppy, lower-trending soybean market since the early January high has you frustrated because you have cash soybeans around, join the crowd.
Our seasonal studies show that late February, just like late October, is almost always a time when soybean prices make a cyclical low. If you're a livestock feeder, these are usually two of the best times to book soybean meal ahead.
Five key factors to watch in the weeks ahead:
Weather. Dry conditions in the U.S. last year rallied the corn and soybean markets as the eastern and far western Corn Belt went through some of the worst growing conditions in the last 20 years. Corn yield fell to just 130 bu/acre and the national yield projection for soybeans came in at just 37.8 bu/acre.
The current drought monitor shows the area that's under a drought expanding in both the eastern and western parts of the Corn Belt. With growing global demand and smaller U.S. corn, soybean and wheat crops, prices will be weather sensitive.
South American weather has been mostly favorable, and fundamental traders are figuring in a record South American soybean harvest — 9-10 million metric tons (340-370 million bushels) larger than last year. Any adverse change in weather or threat to the South American soybean crop will result in a hard, fast rally.
The U.S. dollar, which fell by about 20% in 2002. The lower dollar has helped meat and grain exports. The strong U.S. dollar held back U.S. farm exports during the entire time period of Freedom to Farm. With the dollar falling below $1.04 in the world market, look for the next support level at 94-96¢ to be tested in 2003. The lower dollar will increase the cost of farming, but is also positive for the commodity price outlook.
World economic outlook. U.S. interest rates continued to fall in 2002, with short-term rates falling to 40-year lows. The Federal Reserve continues to try and prop up the U.S. economy by expanding the money supply and keeping rates low. With the current 3% yield on five-year treasury bonds, commodities as an asset class will be bought on setbacks. If any weather threat occurs in either North or South America in 2003, look for record commodity fund participation. That will create volatility and opportunity.
The Commodity Research Bureau, an index of ag commodities. This soared higher in 2002, with most commodities posting gains of 20-22% while we watched the U.S. dollar drop by about that same amount last year. With declining global grain stocks, low interest rates and a large global increase in money supply, look for higher commodity prices again some time in 2003. It's just a question of timing.
Seasonal trends, which suggest lower corn and soybean prices into late February. The much-anticipated USDA new-crop forecasts for 2003-2004 will be out Feb. 21. These reports have been consistently bearish for corn and soybean prices the last three years.
USDA has overstated new-crop soybean stocks the last eight years. No matter what the numbers say, corn, soybean and wheat prices have usually trended lower for the week after the report. Once this report is factored in and the March 1 cash grain sales by farmers are made, the fundamentals are in place for a late February seasonal low.
What to do?
Avoid cash and new-crop sales in late February. Producers who followed Northstar recommendations have been sold out of cash soybeans since late November 2002. These farmers are holding call options or vertical call spreads. We plan to use the late-February to early March low as a place to buy additional calls or buy back the short side of any call spread. With new-crop soybean prices at or just below loan, we have no interest in selling 2003-crop soybeans at this time of year.
Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want more information, write: Northstar, 1000 Piper Jaffray Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail: email@example.com.