Last week’s USDA Supply Demand report for soybeans confirmed what some soybean traders have suspected for some time. Despite what bulls deemed “adverse weather” earlier this summer, the 2016 US soybean harvest will be a record. According to the USDA, US soybean fields will yield 4.1 billion bushels of soybeans – a new all time high.
This will result in a 2016/17 US Soybean ending stocks figure at 330 million bushels and a stocks to usage ratio of 8.2% – both the highest in a decade. (To learn more about the importance of ending stocks and stocks to usage ratio in grain price forecasting, chapter 14 of The Complete Guide to Option Selling, 3rd Edition)
A record 2016 US Soybean harvest will result in the highest ending stocks and stocks to usage ratio in a decade.
Effect on Prices
Soybean prices, curiously, have held relatively steady in the wake of the report. Bulls argue this is because the report was already “priced in”, that demand is brisk, and that the soybean crop is not yet “finished.”
We think it is a result of stubborn bulls, still holding out for the bad weather they so desperately hoped for this summer – got a taste of in June – and then watched in vain as their profits dissipated.
Make no mistake – This is a bearish development for soybeans. You may argue brisk demand. But demand is factored into ending stocks. You may argue the crop is not yet in the barn. But the crucial “podding” period for soybeans, when the crop is said to be “made” is has all but wrapped up – to a quite successful conclusion. Weather reports for much of the Midwest for the remainder of August are widely cool and wet – an ideal condition to finish out the crop.
In addition to these fundamentals, soybean prices have another challenge in the weeks ahead.
Seasonal Tendencies Spell Trouble
As the soybean harvest begins in September, new supplies begin to accumulate. Economics 101 dictates that when supplies are highest, price should be lowest. The soybean market has tended to adhere quite strictly to this principle in years past. As supplies begin to build in September, prices have tended to plummet. While past performance is not indicative of future results, we have no reason to believe a similar price decline could not occur this year as a result of new supplies being harvested
Caption: Soybean prices have tended to decline in September as the new harvest causes on hand supplies to surge.
Conclusion and Strategy
With the 2016 US soybean crop expected to be an all-time record and ending stocks pegged at the highest in 10 years, soybean fundamentals appear decidedly bearish. Yet prices, while off summer highs, appear to have not yet priced the impending new supplies. Historical tendencies suggest that harvest price declines typically do not begin until September, when the new crop is harvested.
