MARKETS OUTLOOK The other side of the story “In all intellectual debates, both sides tend to be correct in what they affirm, and wrong in what they deny.” -John Stuart Mill
By Pedro H Dejneka, AGR Brasil, AgResource
With vast speculation taking over the commodities sector since early March giving way to historical vertical-like price moves, there has been a “race” to try and matchup “fundamental reasons to justify” the rally.
As “enlightened” as such statement by what Stanford University calls “the most influential English speaking philosopher of the 19th century” is, one could easily make an argument that when it comes to commodity market analysis the statement seems to be as useful as a bicycle to a fish. In the world of commodity analysis, there seems to be a constant attempt to “prove the unprovable” on the part of the trade. With vast speculation taking over the commodities sector since early March giving way to historical vertical-like price moves, there has been a “race” to try and matchup “fundamental reasons to justify” the rally. It seems as though even the best and brightest get caught in this game of cat and mouse. Significant changes to South American soybean crop totals as well as intense early year demand by the Chinese and now, more than ever, speculation over the potential for drought-like weather conditions for the U.S. crop, have indeed provided some much-needed fuel to the soybean market in Chicago. These conditions have given way to heavy speculation about U.S. and South American balance sheets, which has been exacerbated by the lack of significant data-points between late March and early July, creating a true “free-for-all” in balance sheet estimates. The dominant feature of this past month in many “insider” comments and analysis has been the extrapolation of Chinese demand pace and of cuts to South American production with 15/16 and 16/17 U.S. soybean balance sheets. Two things are very interesting to note: 1: The trade seems ready to simply assume that U.S. yields will be, at best, trend. Many analyses we have come across recently show yield scenarios going only down from 4646.5 bpa. Such is the power of the El Niño to La Niña effect in people’s psyches. Yes, the weather has been drier than normal and hotter to much hotter than normal in parts of the U.S. Midwest, however, it is indeed only June – and crop conditions in soybeans are at the highest level ever for this time of the year. 2: The use of constant demand figures under different yield and total production scenarios. This one is astounding as it completely throws out the basics of supply x demand law, assuming demand for U.S. soybeans as completely inelastic. Well… we beg to differ and as you can see by the attached table, doing our best to try to show “both sides of the story. Note that only yields nearly 10 percent below trend would seem sufficient to take soybean endingstocks in the United States near or below the 200 million bushel and 5 percent stock-to-use mark. Such levels would still be around 2x the level of ending stocks in 2014/15, when soybean prices peaked near $10.60. Yields near or above trend, even with unchanged soybean planted area, would take stocks to much more comfortable and near historic levels of 400-500 million bushels (translation: 400+ million bushel stocks do not inspire the need for rationing of supply through higher prices). “But you are using demand numbers that are too low given the cut in South American production in 15/16 and the pace of Chinese demand!” Ahhh, we were hoping you would make such comment. We caution against extrapolating demand switches to the U.S. for the 16/17 crop year due to cuts in 15/16 to the South American crop. One must keep in mind that by late February of 2016, Brazil is locked and loaded to supply soybeans to the world. Furthermore, South American production in 16/17 is likely to have a new record potential, even with the expected slight reduction in
86 | September 2016 - Milling and Grain