Analyst argues soybeans are undervalued and a dramatic correction is inevitable, which would also affect canola prices
Soybean prices are severely undervalued and due for a correction in the coming months and that should bolster canola prices as well, says an analyst.
Todd Hultman, lead analyst with DTN, said the United States soybean stocks-to-use ratio is 10.5 percent, which would suggest an average cash price of US$9.60 per bushel.
But the average cash price was $8.33 per bu. on Feb. 11 when the U.S. Department of Agriculture released its latest World Agricultural Supply and Demand Estimates (WASDE) report.
Hultman believes the two culprits behind the undervalued price are the coronavirus outbreak and continued uncertainty with the phase one trade agreement between the U.S. and China.
“We’re kind of in disbelieving mode right now,” said Hultman.
“It just feels like the market is in the mode of, ‘OK, if there’s really going to be sales, let’s see them.’ ”
Currently, China appears to have more interest in buying beans from Brazil because they are about 13 cents per bu. cheaper than U.S. beans due to prospects for an abundant crop and Brazil’s weak currency.
Hultman said something needs to happen to jolt the soybean market out of its bearish sentiment.
“Boy, wouldn’t it help to see some export sales go through?” he said.
“That would probably be the shot in the arm that would help the most.”
But that might not happen until the new crop year begins in September.
That appears to be what the USDA is thinking. It increased its 2019-20 soybean export forecast by a mere 50 million bushels over its January estimate in the latest WASDE report, despite the Jan. 15 signing of the U.S./China trade pact.
The USDA’s chief economist issued a statement prior to the release of the WASDE report reminding people that the 2019-20 crop year for soybeans ends on Aug. 31.
The implication was that China’s additional 2020 purchases of agricultural commodities might not happen until the last four months of the year, which would be counted in the 2020-21 numbers.
Hultman thinks that could be the case since China tends to buy most of its U.S. soybeans shortly after harvest, when prices are most attractive.
He is confident sales will eventually materialize, whether at the end of this crop year or the beginning of the next. When it happens, it should dramatically boost soybean prices and drag canola along for the ride.
Commercial traders also appear to see some upside, taking a slightly net long position in the soybean futures market.
“Any time you see commercials respond to a cheap price, that is typically a good sign of demand in the market,” said Hultman.
The non-commercials still hold a net short position in the market, indicating that they are not yet comfortable in celebrating the U.S.-China trade deal.
“I have to say, I don’t agree with that position,” said Hultman.
He hopes oilseed growers won’t have to wait until next fall to see a correction in undervalued soybean prices.
It could happen as early as next spring if U.S. growers planted a conservative 84 million acres of the crop or if there are planting problems in the waterlogged northern Plains.
Or it could happen even earlier than that if coronavirus infection rates start declining.
He is encouraged that China is forecast to import 88 million tonnes of soybeans in 2019-20, which is in line with the previous five-year average. So it appears as though demand is alive and well.