OPINION: Soybean futures risk is to the upside, trade deal or not

At a time of rising geopolitical tension between the US and China and with a trade deal appearing less likely to be on the horizon, what upside opportunities are there for soybean prices?

The answer seems to lie in the sharp fall in ending stocks projected by the USDA for this marketing year.

From the 2018/19 to 2019/20 marketing year, the USDA ending stock forecasts have virtually halved from 913 million bushels (24.85 million mt) to 475 million bushels (12.92 million mt).

In the modern era of grain trading, we can find three times when this situation has more-or-less happened.

The first was from the 2012/13 marketing year to the following marketing year when the carryout went from 143 million bushels down to a modern-day record of 92 million bushels.

Futures prices averaged $14.76/bu in the 2012/13 season, but then actually fell to an average of $13.53 at the beginning of the 2013/14 period despite the pressure on stocks.

We can attribute this to two factors.

Firstly, the 2012/13 crop was hit by a drought crippling the harvest in 2012. Secondly, soybean production rebounded the following year to a record high with traders then realising that large bushel volumes were headed their way.

So, if this first example was the exception, what about the other two cases?

From the 2006/07 marketing year to 2007/08, ending stocks fell from 574 million bushels to 205 million bushels. And in this case, tighter supply did have an impact on prices, with average nearby futures rising from $7.30/bu to $12.58/bu.

For the third example, from the 1994/95 year to 1995/96 soybean ending stocks fell from 335 million bushels to 183 million bushels.

In this period, average soybean futures prices hit $7.39/bu in 1995/96, up from the $5.70/bu average seen in the preceding marketing year.

If you think that ending stocks still don’t reflect the situation we are in because of the huge 2019/20 beginning stocks then try this:

The stocks to use ratio this 2019/20 marketing year is projected to fall from 23% to 11.4%.

Similar falls were witnessed in all three historical examples given, with the ratio falling in 2013/14 to 2.6% from 4.3% in 2012/13.

From 2006/07 to 2007/08, the ratio fell from 18.7% to 6.7% and from 1994/95 to 1995/96 it fell from 14% to 7.8%.

With exception of the first example that we can discount because of the large uptick in production for 2013/14 year in addition to the very high average prices in 2012/13, the other two examples saw average futures prices rise year-on-year by an average 72% (2006/07 to 2007/08) and 30% (1994/95 to 1996/97).

I think that the risk is looking to be on the upside for the rest of this marketing year.

Charlie Sernatinger is a broker with ED&F Man in Chicago.