With combines back in the fields again this week, the bears were back out in force as far as crop prices were concerned. From last Friday’s close to Thursday afternoon, December corn was down 6 cents and November soybeans were down 15 cents, also pressured by disappointing exports.
In the case of soybeans, we have to keep in mind that the market has several price tiers after this fall’s heavy rains. The prices on the futures board represent the best of this year’s soybean harvest. As DTN’s Cash Grain Analyst Mary Kennedy and Farm Business Editor Katie Dehlinger have been explaining in recent articles, soybeans that suffered too much moisture in 2018 are facing discounts at the elevators, or being refused altogether and sold for cheap livestock feed.
Surprises in Export Sales
In the case of soybeans, it is no surprise that China was largely absent from Thursday morning’s export sales report other than to mention a sales reduction of 2.2 million bushels (60,000 metric tons). After all, Chinese officials have been steadfast in their “just say no” political message for U.S. soybeans.
What is a surprise, however, is how several other countries that stepped up and increased U.S. soybean purchases in July and August have largely vanished in September and October. Even as the FOB soybean price in New Orleans stands $2.23 a bushel cheaper than the comparable price at Brazil’s ports.
The U.S. Census Bureau will release its September report of soybean export details on Friday, Nov. 2, and we at DTN will give them a close look as they sometimes vary from the weekly totals. Unless there’s a surprise, however, we have to say that in terms of sentiment, this has to be one of the more bearish moods that soybean traders have experienced in some time.
When market moods get either heavily bearish or bullish, my contrarian antenna come out, and this seems as good a time as any to ask if cash soybean prices are near long-term lows.
Notice I intentionally did not say, “are prices going higher from here?” because that falls into the super-human category of predicting the future. Mere mortals haven’t shown very good ability answering those kinds of questions, but just as we can learn to recognize the approach of winter, we can also pick up on signs that indicate when prices have gone too far in either direction.
Regarding Thursday’s DTN cash soybean price of $7.43, here is my contrarian checklist.
First, are noncommercials net short in the market? Yes, speculators held 69,526 net-shorts on Sept. 18 when the low of $7.12 was reached. As of Oct. 16, noncommercials were still net-short 29,744 contracts, an indication of bearish sentiment among traders. The presence of noncommercial shorts puts soybean prices below equilibrium.
Are commercials net long? Yes, 62,978 net-longs as of Oct. 16 — a sign of attractive value from the firms that know the most about demand.
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Are cash soybean prices near the low end of their five-year range? Yes. As of Thursday, soybeans were in the 11th percentile of their five-year range. From a larger perspective, current cash prices are near their lowest level in 11 years, very close to the December 2008 low of $7.31.
Are cash soybean prices below their average cost of production? Yes and no. If land expense is included, USDA’s estimated average cost of production for soybeans is $452.79 an acre or $8.53 a bushel, based on a 53.1 bushel yield, which is likely to change by January.
For growers that own their land, the cost of production is $5.79 a bushel, based on USDA’s cost and yield estimates.
USDA’s Cost of production forecasts found at: https://www.ers.usda.gov/…
How long have prices been below their four-year average? Except for four brief months earlier in 2018, cash soybean prices have traded below their four-year average for just over four years, one of the longest stretches in more than 50 years.
How do current prices compare to previous long-term lows? In terms of production cost, $7.43 in 2018 is 13% below USDA’s cost estimate, but nowhere near the 42% discount to cost that cash prices reached in October 2001, one month after the attack of 9/11.
By today’s standards, the October 2001 low of $3.86 is the modern equivalent of $4.95 a bushel and stands as the modern king of long-term lows in soybeans. With 42% of noncommercial positions long at the time, traders weren’t bullish then either.
Of course, some growers may be receiving close to $4.95 a bushel for this year’s damaged crop, but that is the exception in 2018. As cheap as cash soybean prices appear to be, they do not compare to the most extreme lows in soybean history.
In a year when soybean prices have been beat down by a trade war with China, a record harvest in Brazil, a possible record harvest in the U.S., and now a sharp drop in exports, I can’t tell you how prices will pan out in 2019 or how long China’s tariff will last. However, I can say that Thursday’s national average cash soybean price of $7.43 meets five of six bullish conditions on my contrarian checklist.
Yes, there is still downside risk in this market (as there always is), and compared to production costs, this is not the cheapest soybeans have ever traded. From a contrarian view, however, it is the most bullish arrangement soybean prices have seen since 2001.
Todd Hultman can be reached at Todd.Hultman@dtn.com
Follow him on Twitter @ToddHultman