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Market Commentary for 3/4/24

Jon Scheve with weekly market commentary made on March 1, 2024


The soybean market has lost nearly $3 per bushel in value from early November. Most of this steep decline is due to South America’s crop getting bigger and worldwide demand not increasing at the same speed. There are some in the trade expecting bean prices to rebound.

 

Several South American crop watchers are reporting that yields there are shrinking due to dry weather during the growing season. However, these groups may not be taking into consideration that overall planted acres may have increased significantly compared to last year, which could have offset much of the yield losses.

 

Also, some market participants think the current reported USDA’s crop size of South America is higher than it should be. They point to CONAB, Brazil’s equivalent to the USDA, lowering their yield estimates the past few months to a total production under 150 Million Metric Tons (MMT). The USDA has not made the same adjustments as they are 156 MMT; therefore, these market participants say it is only a matter of time before the USDA changes their yield estimate lower, which should lead to a market rebound.

 

However, CONAB’s track record for estimating crop production size in Brazil has seen that in 7 of the last 9 years their February to their final report was adjusted higher with an average increase of 5 MMT. The range in those years was somewhere between 2 and 12 MMT. In 2021 they showed almost no change, while only 2016 saw a further decrease in their estimate from this point forward.

 

Another issue is that the value of soybeans shipped from Brazil are currently at a substantially discounted price compared to US beans. Brazil’s bean prices are so low, several shipments have even been purchased for delivery to the US east coast over the next few months.

 

Market Action – 2023 Soybean Sales

As I have mentioned before, I sold 25% of my 2023 bean crop for $14.04 at the end of 2022. I then bought put options to protect my downside during the growing season. After rolling the original puts I purchased down to lower values in September, I was left with a cost of only 8 cents on that 75% of my bean crop after those puts expired in late October with no value.

 

After the puts expired, futures went to $14 again and it looked like they could go even higher, but then the market turned lower as this chart shows.



Nearly one year after selling my first 25% of the crop, I sold my second 25% of the crop at $13.11 at the end of December.

 

I considered selling all of my remaining beans at that point as well. However, based on market conditions at that time, there were several reasons that futures seemed to have a better chance to go higher than lower in early 2024. 

  1. In late December, Mato Grosso was having the driest 30-day window during the reproduction stage of development for their soybeans in over 40 years. This seemed to indicate that the crop was going to get smaller, and prices would rally.

  2. In 9 of the previous 10 years, futures values eventually traded higher in January or February compared to where they were at end of December. The only year it did not trade higher was in early 2020 as Covid began to spread across the globe and demand fell.

  3. In December the USDA indicated a tight carryout for US production. This included an export pace estimated to be nearly as low as it was during the trade war several years earlier. This seemed to suggest the market was going to need to ration demand further with higher values.

  4. The January to March futures spread was narrowing from a big carry to a small carry, suggesting there was underlying demand for soybeans.

  5. Farmers seemed to not be selling beans under $14 futures, which suggested prices could push back higher in early January.

  6. Since I had 100% of my 2023 corn crop fully protected near $5.90, and now 50% of my 2023 beans priced at an average of $13.57, I felt comfortable waiting to see where the market went in early 2024.

 

Unfortunately, none of the above helped turn the market around. Despite below average rainfall, Brazil seems to have managed planting more acres to increase production to satisfy market needs.

 

Therefore, on February 14th, I set futures prices on my final 50% of productions at $11.86. After rolling my November and January sales to the March contract, and accounting for the put option costs, I have an average sale price of $12.71 on the March futures contract.

 

Looking back, I am glad I sold the first 50% when I did, and like many other farmers, I wish I would have sold the remaining 50% sooner. However, the risk of going against historical trends and the poor weather conditions being reported in South America made it seem like it would be a mistake at that time to sell. 

In a future newsletter, I will share how and when I set the basis on my 2023 soybeans.



Jon Scheve

Superior Feed Ingredients, LLC

9358 Oak Ave

Waconia, MN 55387

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