The soybean market may be storing up trouble for itself.
Agrimoney.com cautioned investors two weeks ago, as soybean
prices were falling, against expecting weakness to continue.
Now, as prices hit multi-month highs, the website is warning
investors to avoid believing that high prices will stick around for ever
This feeling of vertigo does not surround so much the front
contracts which are making the biggest waves.
The best-traded May contract, which set a seven-month high
on Thursday, is certainly looking expensive, up more than 12% for February.
But that could be warranted given the resilience of US exports
in the face of cheaper South American supplies.
It looks like buyers are importers to pay a premium for
certainty of deliveries from the US rather than the playing Paranagua roulette –
taking a risk on whether competitively-priced Brazilian supplies will negotiate
the pitfalls and potholes of the country's transport system to arrive in time.
The rally may extend until imports become a realistic option, encouraged by the east coast US livestock producers which have rarely been shy of publicising large discounts in foreign supplies.
The real discomfort is the height at which new crop soybeans are
November 2014 soybean futures are up nearly 7% this month, hitting
a five-month high on Thursday, sending a strong signal to US producers to sow
the oilseed this spring.
Indeed, at a historically-high ratio of 2.53: 1 compared
with the price of December corn futures, they are telling farmers to ditch the
grain in favour of soybeans.
But when it comes to harvest this autumn, the market could
look very different from today's.
Not going away…
Sure, Brazil's soybean supplies may not be currently proving
as popular as investors had thought.
And there may not be quite as many of them as the 90m tonnes
or so investors had thought. Current estimates are some 3m-5m tonnes less,
after damage to crops from too much rain, or too little.
But they will hit the market some time. Brazil will still
leave some 40m tonnes to sell - even if that means getting them to port before signing
up buyers, and leaving deals until later in the calendar year.
Furthermore, Argentine farmers may start selling up later
this year too. They have hoarded stacks of soybeans from last year, perhaps 7m
tonnes, as a dollar-denominated hedge against a falling peso. The US Department
of Agriculture sees overall Argentine soybean stocks rising 37% over 2013-14.
Hoarded crops are going to make quite a splash when they do
make it to market, on top of the 53m-54m tonnes Argentine growers are seen as
about to harvest.
Upside vs downside
It is not obvious that the need for US soybeans is as strong
as the market is suggesting.
Producers would be wise to price some crop.
Sure, the return of front Chicago futures contracts above
$14 a bushel highlights the upside to values from the $11.78 a bushel that
November futures are trading at.
But the US Department of Agriculture's projection of prices
averaging $9.65 a bushel next year highlights the downside too.