The term volatility is likely to return in force to the soybean market this year.
Soybeans and corn have been in a tight trading range over the last six months, according to Luke Swenson, president of The Money Farm, in West Fargo, N.D., adding that in early March, markets pushed well below the recent lows in both of those commodities.
“Wheat actually led us out and then corn and beans were the ones that finished solid on the news by forming some technical bottoms there,” Swenson said. “Everyone is trying to guess what’s going to happen going forward, but the problem is everyone’s guess hinges off of whatever is coming out of China. And that’s anyone’s guess.
“We think we’re narrowing down, and through the process of attrition we’re moving catastrophically bad,” he continued. “ We think we’re narrowing in on what we think the actual outcomes are going to be, which is good, but before you’re going to see traders, whether it’s on the fund side or on the grain side, commit to anything, you really need to actually have a good resolution in place there. Hopefully by the end of March is when we’re going to see that.”
As of March 5, Swenson noted that beans were up 11 cents as they had been bouncing around and overnight, he said Trump officially asked China to remove all ag tariffs.
“I’m not the biggest fan of Trump but the team on this trade deal, for them to ask for that I think there’s some hinting in there that (China is) going to make a concession one way or another,” he said. “Whether or not it’s this North Korea outcome that’s causing us to ask for this to see if China’s shaky, it’s anyone’s guess, but the market is obviously liking that this morning.
“If we do continue to push higher we still think, looking at weather, looking at conditions out there, ending stocks, even if we get a big trade deal with China, we think upper $9s for new crop soybeans just needs to be sold hard,” he continued. “If you want to keep some upside open you can, but we don’t think people can be ignoring this, especially with the way the spring is setting up at the moment.”
The way spring is setting up is a potentially late spring with February setting a record for snowfall in Minnesota and frequent Arctic blasts of cold weather across the region. There is also risk of flooding.
In the Red River Valley of eastern North Dakota and western Minnesota local cash prices were at $8.80, according to Swenson.
“We’re going to be aggressively adding more there. We’ve got targets out there,” he said. “We just protected 20 percent at $9.60 using puts and selling calls above the market. Hopefully the market rallies and finishes above our window.
“I can handle farmers being angry that they got stuck with $10 beans or $10.25, but I can’t handle guys being angry that they got nothing sold and we’re down to $8.60 futures,” he added.
There are still rumors of China buying U.S. soybeans though nothing concrete as yet. Still the rumors did get the market excited.
“We finally were getting headlines coming in U.S. dollar terms,” he said. “Early on in this trade debate it’s always been focused on dollar/trade deficit. So, the nice thing that they’ve been doing on the ag side is they’ve been talking about ag products in terms of dollars. You saw when (China) said, ‘we’re going to buy an extra $30 billion potentially with this deal,’’ the market realistically perked up to that because that’s a number they’re paying attention to.
“Then on another Trump tweet they said 10 million tons,” he continued. “As soon as that came out the market collapsed because it’s kind of a (misleading) text because no one has been talking in ‘ton’ terms from China for months, so they don’t believe it.”
As far as getting actual purchases done, Swenson said the majority is coming from silent grain and Chinese state-owned companies so the tariffs are a moot point. When you look at cash activity, there hasn’t been much out there, even ones that are getting through tariff free, he added.
Although negotiations with China are continuing, there is some concern whether the U.S. will lose market share to China, who has been purchasing beans from other sources during the standoff, if the dispute continues without resolution. The answer is two-fold, depending on short or long term.
“One, the U.S. is going to win because we have to,” said Swenson, comparing it to Las Vegas oddsmakers. “Vegas can afford to be wrong a lot longer than you or I can. Well, fortunately in this case, the U.S. can probably hold its cards a lot longer than China can so China is going to need to capitulate and give us some opportunity.
“The downside is in the long run this is going to force them to start migrating market share elsewhere and try and source more from South America, Australia, the Black Sea region,” he continued. “We’ve already seen some of the Russian government trying to partner with them and do some farming deals with them.
“But in the near term, no. We’ve been saying in the near term the demand is there,” he added. “If we lose 100 million bushels in demand from China, they’re taking an extra 100 million from South America, well, all we’re going to do is fill that extra 100 million from other locations.
So, we’re not worried about market share disappearing in the near term, it’s more over a longer-term concern for us.”
As the market waits for the trade dispute to be resolved, spring planting is around the corner and producers are making their plans. In the meantime, Swenson recommended producers look for marketing opportunities.
“We’re pushing back toward this $9.60 area. You can buy a put spread of about 60-70 cents of downside protection and then sell a call at about 70 cents above the money,” he said. “I believe that’s running right around a dime for cost, so at the money you get 60 cents downside and you get 60 cents of upside still open. I think that is a great way to put some floors in on beans and that’s using new crop price which expires in July, they’re called short-dated options. That’s probably the best way to insure yourself going into this season.”
As for spring planting, with a potentially late start Swenson said that could mean a surprisingly higher bean number the longer planting is delayed.
“If that’s the case, markets could get beat up into June and then we’ll have to take all those floors off on expiration and probably let the market work closer to harvest and see what the situation looks like then,” he said.
“We think realistically that the mid-80 million acres area is probably where it will end up, maybe around 84 million. We think it’s going to be a little higher than that.”