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High soybean prices may be storing up trouble

The soybean market may be storing up trouble for itself. 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 either.

Paranagua roulette

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.

Sowing signals

The real discomfort is the height at which new crop soybeans are trading.

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.

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