Stocks are starting to shrink significantly in the U.S., but there are also signs that demand in China might be easing
Todd Hultman typically draws a red rectangle on the right side of his soybean price chart indicating the range for his price forecast for the remainder of the year.
This year, DTN’s lead analyst replaced the rectangle with a red question mark. There are simply too many unknowns to come up with a high and low price for the 2020-21 marketing year.
On the one hand, soybean stocks in the United States are getting incredibly snug.
The U.S. Department of Agriculture reduced its ending stocks estimate to 175 million bushels in its December World Agricultural Supply and Demand Estimates report, down from 190 million a month ago.
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Hultman thinks it could ultimately end up as low as 100 million bu. Informa Economics has a sub-100 million number.
If stocks get that low, the U.S. cash price would skyrocket. It was already sitting at $11 per bu. last week.
“As tight as things are, beans in the teens I cannot rule out,” he told delegates attending DTN’s virtual Ag Summit.
“That is a very real possibility.”
In fact, Hultman thinks prices in the teens would be a “slam dunk” if South America experiences some of the La Nina-related weather challenges his colleague Bryce Anderson is forecasting.
“It’s a bit of a riddle to me why we’re not pricing soybean prices higher than we are,” he said.
“It makes me wonder, are people expecting China to show up with some cancellations? That’s always a possibility.”
There are some bearish factors emerging in the soybean market.
Futures prices on China’s Dalian Commodity Exchange recently dropped below the 50-day average for the first time since the beginning of July.
And weekly sales of U.S. soybeans to China have been on a steady downward trend since the end of October.
“It does look like their soybean demand is starting to wane,” said Hultman.
The bullish 25 cents per bu. spread of January over March futures has evaporated, indicating the market may be comfortable with U.S. supplies until Brazil’s crop comes off.
But what makes him really nervous is the record net-long position that non-commercial investors have taken in the soybean market.
That is a huge bullish bet, but that net long position could be sold off at some point in a big bearish correction. That is creating market anxiety and volatility.
“The uncertainty level here is very high. I can’t underestimate that,” said Hultman.
He found it easier to come up with a cash price forecast for corn ranging from a low of $3.40 per bu. to a high of $4.40 per bu.
The cash price was $4.03 at the time of his presentation last week, so he feels there is some upside in the short-term before prices start their seasonal downward trend.
The USDA is forecasting 1.7 billion bu. of U.S. corn ending stocks, which he feels is about right. That would result in an 11.5 percent stocks-to-use ratio, the lowest in seven years.
Exports have been higher than anticipated due to reduced competition from Brazil and Ukraine and voracious demand out of China.
Corn prices in China are the equivalent of about $10.25 per bu., so there is still plenty of incentive to import more from the U.S.
Hultman said a good target price for growers is $4.20 per bu. based on historical data when stocks get that low. However, he noted there has been a lot of historical “play” on either side of that number.
Once again, his biggest concern is that non-commercial funds have taken the largest net-long position in nine years.
“There is a little anxiety up here at this $4 mark,” he said.
Even wheat has seen an improvement in its fundamentals with U.S. ending stocks projected at 862 million bu., the lowest level in six years.
Hultman has set a target price of $4.70 per bu. for hard red winter wheat. Last week’s price was already above that at $5.10 per bu., due to dryness in Russia and the U.S. winter wheat growing region.
Russia had the driest fall in 30 years, and Anderson is forecasting expanding drought in the spring and summer of 2021 in the southern Plains region of the U.S.
Supplies of hard red spring wheat (HRS) are heavier than usual. The target price is set at $5.40, which is above last week’s levels of $5.16.
The HRS stocks-to-use ratio is 48 percent. It needs to get below 40 percent before the outlook turns bullish for that crop.
