Buy or sell: Soy hinges on La Nina, RenovaBio and trade policy

The fears around La Nina now appear warranted, forcing soybean prices on the Board to rally 7% since the start of the year, and leaving traders to speculate how high can futures go while US stocks still grow.

Some are hopeful the Board will rally as high as $12/bu, which would be a 10% increase on where they are currently.

However, the spike of that rally occurred while China was limiting purchases and logistical infrastructure made getting beans to market much more difficult, leaving others to worry that the market may be overbought.

The following summarises the fundamental bearish and bullish factors in soybeans.

BUY

Chief among the bullish factors is how dry can soil moisture get in Argentina.

This week both the Rosario and Buenos Aires Exchanges slashed their outlook on the Argentinian crop to under 50 million mt for the first time in six years.

Many analysts are now saying the drought is the worst it has been in 10 years.

The main harvest starts in the north of the country around the middle of March, although the market may have to wait until April to get a clear idea of yield when the region around Buenos Aires brings the crop home.

A second reason is rampant demand for soybean.

Chinese buying is set to rise 5% this year to 100 million mt, even despite reports that it is trying to use more hybrid meal as feed as opposed to soybean meal due to cost savings.

Those figures are replicated on a global stage, with demand overall rising 4.4% versus a slight dip in production, according to figures published Thursday by the International Grain Council.

Thirdly, biofuel policy in Brazil is expected to drive up demand for soybeans with crushing rates expected to rise as the nation’s RenovaBio programme to increase the blending mandate of biofuels in Brazil to 10% from 8% kicks in in March.

That will create additional demand of 25% for biofuel, most of which Brazil will source from soybean.

Finally, rains in Brazil could hamper the harvest, with talk of high moisture levels and low yields in the third-largest producing state, Rio Grande do Sul.

SELL

That being said, Brazil is expected once again to bring home a massive harvest, with analysts expecting up to 116 million mt will be pulled in from the field, 2 million mt more than last year.

And while most of that may be factored in, private and public estimates keep rising.

Secondly, and perhaps the biggest black swan in the room is the prospect of a trade war between the United States and China.

By April, President Trump will have to decide whether to put import tariffs on steel and aluminium – a dynamic that may hurt China’s price as much as its pocket.

Any retaliatory action is likely to hit US soybean and could see a immediate price collapse on the board by as much 7-10%, according to analysts.

Thirdly, the US is running behind on its export programme.

On Thursday, the USDA said it expected to sell 4 million mt fewer of soybeans this year than it did in its previous estimate, which leads to the question of what level farmers are willing to sell forward.

And the answer to that question is currency.

Earlier this week, an influential Brazilian think tank recommended that farmers silo beans as it expects the Board to get even higher.

However, Agricensus figures for Brazil show that FOB values priced in reais are already very high at BRL 1,315/mt, which could entice selling.

Meanwhile, Argentina’s currency has fallen sharply since December, leaving some farmers pondering whether to sell at between $300-310/mt, which is where prices currently are.