Are Soybeans Ignoring Weather

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Mother Nature appears to want the last laugh this year. For all the struggles producers faced since day one of planting, the battle has drug well into harvest. Now, looking at the radar, we have heavy enough snow in the Dakotas to justify calling off school, flooding through the central Corn Belt, and if that wasnt enough, Hurricane Michael is expected to make landfall in the next few hours. Then, look at the board, and the markets are lower nearly across the board! How can that be?! Especially when social media is FULL of down crops and moldy soybeans?!

Unfortunately, the coming USDA reports had their data gathered prior to the monsoon of 2018 when the crop was still in excellent shape, and worse yet, the market will trade what the USDA says. Recent history has proven to Managed Money that radar and talk of too much rain has recently resulted in record breaking crops.

Over the past 28 years, the USDA has lowered yield from September to Final 10 of those years by an average of 3.2% and a range of 0.7% 6.9%. Yields have been raised 18 of those years by an average of 5.17%.

From the point of view of a guy that doesnt know soybeans from sunflowers, the mind set of many in the market place remains bearish as history has proven. The 28 year worst case scenario of a yield reduction by 6.9% equates to roughly 323 million bushels. Huge by most measures, but the perfect storm of the current 845 million bushel ending stock (likely moving higher tomorrow) would still leave worst case scenario at an ending stock of 522 million bushels and just shy of the standing record. The question for many traders would be, how probable is this kind of yield reduction? An average reduction of 3.2% is a loss of only 150 million bushels.

Now dont get me wrong, here. Those losses are devastating to the producer and the region, but the futures market is looking at the national and global picture.

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Now, shifting away from the psychological aspects of a bearish market, there is also a strong fundamental relationship still to these soybeans. First off, the Cash market. DTN National Cash Index for the month of October has US cash prices rising by 17.65 cents while November has rallied into yesterdays close 17.50 cents. Basis has not worsened in October, but it has not improved either and is a strong indication of the local demand markets. Keep in mind, Quarter 4 Stocks report showed a healthy 337 million bushels of soybeans in Off-Farm storage; given the reduced export outlook and what we know about basis the domestic pipeline is satisfied.

The sudden change is supply and demand logistics with China being absent, the market has likely changed from historical seasonal tendencies. November contract has a strong seasonality to rally into the expiration of the contract; averaging a 68.2 cent gain in six of the past eight years, BUT keep in mind, Novembers current contract low was set on September 18th and has since rallied from contract low to October high by the amount of 62.5 cents. This rally also happened to end at down trend line that was established in the mid-August bounce to 9070. To me, it appears that we have played out the seasonal bounce in soybeans and with no reaction from the Cash side, technical trading has taken over, regardless of how ugly it looks outside.

While on the term ugly, I look to the forward curve of the soybean market. In simple terms, it is a chart showing the carry of the market from month to month, but it is also used to analyze the markets opinion on demand. The larger the carry, the more the market is enticing producers to store and wait.

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To wrap up the bearish factors in play, I cant leave out South America, specifically Brazil. USDA Attach to Brazil recently posted a 2018/19 soybean production estimate of 123.0 MMT and sees exports rising to a record 75.5 MMT. Production is on the rise while global demand has gone stagnate.

Now that we prepare ourselves for tomorrows series of reports from the USDA, we must remember that the market is comprised on many factors and one major factor is emotion; the greatest enemy of any market participant.

Producers out in a water logged and/or water destroyed field cant help but wonder how the market could possibly go lower. Traders stuck in a bearish mindset cant help but wonder how the market could possibly bounce earlier this month. Personal bias will always be a factor when it comes to making decisions but we need to find a way to clear through all the white noise and social media chatter, so we can look at what the market is telling us and for now, the market is satisfied with supply, even with the rain, until it is proven otherwise, the market will continue to assume a record yield.

Those with questions and/or comments should feel free to reach me directly at 312-277-0119. I would love to chat more about my market outlook, how it may impact your operation as well as ways you can mitigate risk via the market place. In the meantime, sign up for our Ag Hedge newsletter and follow me on social media!

Twitter: @AgHedgeGrossman
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Brian Grossman
Market Strategist -- Ag Hedging
Zaner Financial Services
(312) 277-0119 -- Direct Line
(312) 277-0150 -- Fax Line
Twitter: @AgHedgeGrossman
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