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Has World Reached Over Saturation of Soybeans?


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Many soybean farmers will argue with me, but 2018 could have been a big profitable year. For farmers that are currently talking about big yields, 2018 could have been very profitable. For farmers that used wide carrying charges and forward contracted when basis was slightly over what they considered normal, they made money. But storing old crop and hoping new crop would top $11.00, they decided to hold.

I bark about rumor mongering all the time because rumors tend to offer false hopes. Unfortunately, rumors now are bearish. If it isnt the trade war with China being used as the reason soybean prices dropped over the last couple of weeks, traders added another reason to use China for the downturn; African Swine Fever, AFS. Reports are circulating that China will buy fewer soybeans because of it trying to say China wont need as many beans because of herd liquidation from the time AFS has been found in China in April to the present. About 40,000 pigs and hogs have been culled and killed. China is expected in 2018 to raise about 5.4 times more hogs than the US. Even if they kill more hogs, it isnt going to affect soybean usage as much as current reports make it out to be. Chinese production is expected to be 710,000,000 and U.S. production is at 133,586,000. Hogs have a fairly short biological lag of production. Wipe out a few mid-size hog producers in China and six months later corporate producers can have twice as many pigs going to new finishing buildings. China wants to cull mid-size hog production. It is no secret. If China wanted to keep AFS a state secret, they would have done it.

AFS has been a problem in Europe since 2007. Yet, the U.S. is expected to sell more soybeans to the E.U.-28 countries. It doesnt make much sense that the U.S. will sell more beans to Europe because of large scale pork production and they too are culling hogs with AFS and will sell less beans to China, the worlds largest hog producer. The E.U.-28 countries are expected to produce 271,500,000 hogs. Seven countries produce the largest majority of hogs out of the 28 countries. This does not include Eastern Europe (https://www.schengenvisainfo.com/eu-countries/ list of top European Countries)

Of course, the trade wars have hurt soybean prices in the U.S., but as previously reported in several past commentaries, soybean prices were going down before President Trump and China decided to go one on one. It is a simple fact of agriculture; soybean production has been increasing and has reached a point of being far over produced. As I wrote last week, in the U.S., to use a few states, Tennessee, the Dakotas and Wisconsin have seen dynamic increases in soybean production, but they must move beans to other states or export to other countries. Piles of soybeans in those states then become mountains when added into other states.

The U.S. has lost market share because the growth of soybeans around the world has increased and countries such as China shop where they can source commodities. Last week I found several reports about China buying soybeans from Ethiopia. If I asked U.S. soybean farmers what commodities Ethiopia sells I am sure most would say coffee, but few would say soybeans. It best be known, the commodities Brazil and other countries in South America have increased over the past decade could in another decade pale to increasing African production. Money is being pumped into African countries for agriculture from northern African countries on the Mediterranean to the tip of southern Africa and east to west.

Basis

Basis is wider now than I can recall. In years past, price would be down, and basis would be slightly wider. But now, if U.S. prices were lower in Chicago, the basis in Brazil would be far too good.

According to the Iowa Farm Bureaus price table for grains, the Gulf Basis as of September 10th was minus 5 cents to November. For years, basis ran plus $1.00 to $1.05 over the CBOT. Compared to Brazil at the port of Sau Paulo, the current bid is plus $2.47. Of course, Brazil has sold old crop and the bid could be twice what it is now and probably wouldnt get enough unpriced soybeans for November that havent been previously contracted. The basis bids in Brazil for their new crop are currently $1.20 over the March for February delivery, March at .93 cents over the March and for April/May plus .68 cents over July. Bids in the U.S. for 2019 soybeans are almost the negative of what Brazil buyers are bidding. A U.S. farmer selling into 2019 in many areas can pick up from 25 cents to 35 cents. Yes, it sure looks like U.S. soybeans are being shunned.

The rally of late winter and early spring 2018 when daily reports were flooded with weather problems in Argentina should have moved every kernel of corn and every soybean out of storage. July 2018 corn moved from the December 2017 lows of around $2.62 to over $4.10 by May 23rd when it was known that U.S. crops were being planted on schedule. July soybeans on December 5, 2017 were $10.45, dropped to $9.69 on January 11, 2018 and by March 2, 2018 were up to $10.90 and remained above $10.00 through June 6, 2018 when it was known Brazil had a record crop and was shipping it at a record pace, and to top it off U.S. farmers were planting more soybeans under good growing conditions, plus basis was expanding.

2018 as a Year of Learning

This year must be an eye opener and a lesson in marketing. Speculation is for speculators and not for agricultural producers, whether they grow corn, wheat, soybeans, and all other crops, or feed and raise livestock. Many U.S. farmers are surprised that land values are remaining strong. Why? For producers that used cost of production, along with a marketing plan and profit targets, not hope targets, there was money made farming. Profitable farming is one reason Brazilian farm land is increasing. Corporate farms in Brazil dont mess around playing the markets, but use markets to their advantage. Of course some speculate, but it is with risk capital from profits. Hedging is considered a cost of doing business if there are hedge losses.

U.S. farmers know how to grow crops and have some of the best equipment and best education to produce big crops. The time has come when marketing takes a side by side seat. Countless times I may try to contact a farmer and finally hear something like, I am so busy. Rarely do I hear I am so busy with marketing. I cant tell how many times I have heard, sorry, I cant talk. We are putting up new bins.

For soybeans to rally, and to have more than a speculative bounce something has to happen that is unknown at this time. Basis in the U.S. will have to contract for any extended rally. I am not sure if China and the U.S. came to full 100 percent agreements on trade issues if it would be enough to make soybeans rally. Brazil is expected to increase production in the coming year along with increases in land production. Trade agreements Brazil has made with many countries insure Brazilian sales ahead of U.S. sales.

On top of it all, soymeal is competing with Dried Distiller Grains. As ethanol production increases worldwide, DDGs eat into the meal market. Plain and simple.



Get Your Complimentary Guide on Managing Ag Price Risk

Discover how to manage price risk with grain and oilseed futures and options with this complimentary guide. This paper focuses on two common producer strategies using CME Group futures and options: the short futures hedge and long put option hedge.

Get your copy of this useful paper today!



Got a question, I would like to hear from you. Call 913 787 6804 or email me atchris.lehner@archerfinancials.com.

Would you like to open an account with Chris? Go to our interactive New Account application at Open An Account. It is fast, saves on postage and its green.

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The risk of loss in trading futures and options can be substantial. Past results are not indicative of future results or performance. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. Research analyst does not currently maintain positions in the commodities specified within this report. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.



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About the author


For Chris Lehner's entire career, beginning in 1976 fresh out of Michigan State, he has worked with agricultural producers and businesses from the cash side of markets, to twenty-nine years as a commodities broker, branch manager, general manager and senior hedging analyst for two of the largest packing companies, livestock cooperatives, one of the largest seed companies and renowned brokerage and agricultural consulting firms.

He is a stickler about continuing education for his clients, as well as for himself.  His library has well over 100 books from the basics of fundamentals to the micro-economics of markets, technical trading and the masters of markets, plus the extensive notes and recordings from times he spent with some of the very best traders in the futures industry. 

Chris' philosophy on marketing and trading is based on the necessity to adapt to multiple variable factors, while maximizing the satisfaction of movement and change. 

Recently, a client of many years, after reading one of his marketing commentaries called him the Paul Harvey of commodities. Rather than duplicating what other analysts or reporters too often repeat, Chris tells the "rest of the story" for the bull and the bear and finishes with his own outlook.  He uses supply and demand, combined with in depth charts because, like washing hands, he personally feels using two in unison is more efficient.

Chris has a weekly news and website commentary and his daily radio grain analysis is heard in several Midwestern states. Whether it is a phone next to his ear, in person, or in front of an audience, Chris looks forward to sharing and using his experiences to enhance his clients' trading experience.
Chris can be reached at (913) 787-6804, or via email at chris.lehner@archerfinancials.com

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