The latest USDA estimates on South American soybean production are frightening. The graph below gives a descriptive picture of the sharp production increases that have occurred in Brazil and Argentina and that are expected this coming year.
As this column goes to press, a majority of market participants are convinced there's no way the soybean complex can move much higher this coming year. It will likely have a bearish impact on corn prices as well. My simple message - don't believe it. Here are the facts, as we know them today.
This year Brazil produced 32 million metric tons (mmt) of soybeans and next year is expected to produce 33.5 mmt. Argentina produced 20.7 mmt this year and is expected to produce 22.6 mmt next year. Awesome numbers to say the least. But here in the U.S. we have to take those numbers and translate them into what the impact will be on our own exports.
USDA is now pegging this year's U.S. soybean crop at 2.8 billion bushels versus last year's 2.65 billion bushels. Carryover is expected to be 365 million bushels versus last year's 288 million bushels and the previous year's 348 million bushels. Big numbers - but far below what was expected even three months ago. With this level of carryover supplies, soybeans should still average close to $5/bu in the central Corn Belt. The market has been well under that price all fall.
Corn is pretty much in the same boat. With an expected carryover now of 1.8 billion bushels versus last year's 1.7 billion bushels, most of the bearish news is known. Current stocks-to-usage ratios indicate there is a good chance that corn in the central Corn Belt will average $1.80-2/bu. Once again, the market has been below those levels throughout harvest.
So where does that leave us and why do I think this is not a time to be negative on corn and soybean prices? Consider the following:
1) Corn and soybean basis has been strong. One of the simplest indicators of improvement in demand is to watch the basis.
2) The farm financial picture overall is strong. With cash influxes from USDA, there's less need for farmers to sell grain to cover cash flow needs. That means movement between now and February will likely be relatively light, thus strengthening basis levels even further.
3) The long-term trend is up. Technical signals are a strong indication of how the majority really views a market. Never fight the trend in a market.
4) Attitudes among many traders, farmers and analysts are bearish. That's necessary at the bottom of every market. If attitudes were already bullish, this market would have very little chance of going higher.
5) As this is written, grain prices are still under loan rate. It's early in the marketing season. With prices this cheap this early, now is not the time to panic.
Parting Thoughts: As I said in my previous article, this will likely be a year when we'll look back on harvest as when we should have collected LDPs on corn and soybeans, waiting for a rally into February and possibly March, for an opportunity to make cash sales. Nothing has yet occurred to alter that basic strategy.
To keep current on our advice in an ever-changing market, please don't hesitate to go to our Web site at www.brockreport.com