Beaten, but down for long?

I remember in Grade 2 getting myself into a scrap with an older kid named Joey. We were in a sandpit at school, arguing over something I can’t quite recall. Anyhow, I hadn’t yet learned the lesson of not getting into arguments with those Grade 3 giants. It came to blows, and while I was a tough and aggressive little tike, Joey was a lot tougher and meaner and bigger, and I ended up having my head shoved into the sand and getting dragged around the sandpit by the victor. Everybody laughed.

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I had sand in my teeth, eyes, up my nose, etc. Didn’t do a lot for my self esteem, but kept me out of fist fights for the next 36 years (so far).

I imagine any speculators or farmers long soybeans yesterday felt similar to that kid in 1973 getting dragged around the sandpit. Wow, what a beating! Chicago futures opened with a gap down and ended up locked limit down, completely destroying the beautiful rally on the charts that had been going on since late March, taking soybeans from around nine dollars per bushel to almost $11. Go look at the May soybeans contract chart at www.cbot.com. That’s a pretty steep rise and a pretty dramatic break.

But after yesterday’s pounding, as those who are long soybeans and other oilseeds rub the sand out of the eyes and try to sneeze out the sand in the sinuses, it’d be nice to know whether this is the start of a longer beating, or just a one-time thumping before things get back to the recent normal and start rallying again. The May soybean futures chart shows a similar slumping setback occurring in late March, right before the present leg of the rally, with two gap-down days after a bold rise that had taken place from the start of March. Both of these rallies lasted about the same amount of time and fell off the same way, so can we hope for another leg-up soon?

You got me. But whatever happens to market prices will likely have a crucial impact on U.S. farmers’ seeding decisions because those are taking place right now. Any crop rallying as robustly as soybeans have been doing for the past two months – with corn and wheat dragging themselves sideways – is likely to win itself a lot of extra acreage and that’s what soybeans have been threatening to do. American farmers keep their options open right until they actually head out onto the fields. A recent USDA report said U.S. farmers were planning to only marginally increase their soybean acres this spring, a finding that confounded pretty well all analysts – who had universally expected a big increase, but since then soybean prices have gone up, up and up and given farmers new reason to seed the crop, which is cheaper to grow than corn. (November futures didn’t rally nearly as much and are only in the mid-$9s, but they showed a similar bullish pattern.)

For anyone growing soybeans or canola this year, it’ll be great if actual prices in November really do get better and better. But if the recent rally convinces thousands of farmers to throw a few extra acres into the crops because it’s looking so much better than the alternatives, it could have the opposite effect of a self-fulfilling prophecy, destroying the potential profits that the extra acres were drawn by.

So, in a typically contrary way, the market by hammering down soybean futures yesterday may have made the real-world new crop soybean price outlook better, by taking away some of the incentive to plant extra acres to that crop. Other crops suffered too yesterday, but not as badly, and their poor performance wasn’t a shock to anybody’s system.