As the old adage goes, “soybeans are made in August.” But the soybean market is also facing some headwinds.
“China is going to need to keep buying, but the big thing is we’re going into August with some headwinds,” said Luke Swenson, president of The Money Farm, West Fargo, N.D. “There’s no weather premium in the market, and we don’t think there’s much of a reason to have any weather premium in the market in the near-term.
“We’re looking at not a lot of heat, and people are in relatively good shape when it comes to moisture,” he explained. “I think you could see a little bit of pressure as we go into the crop production report for the month of August. If (USDA comes in) and they bump yield and do something crazy on that front, I’d look to see some pressure, maybe take 30-40 cents out of the bean market, so we’re protecting some downside.
“In the long run I still think beans are the bullish story, and I think they’ll lead us out,” he added.
However, in the near-term, Swenson said the market was kind of caught in limbo. He noted the market is relatively stagnant on the news situation, although the country is coming up on the general election and that’s starting to generate some news.
Part of the issue for soybeans is that rhetoric is heating up between China and the U.S.
“It just seems like there are so many conflicting reports, so we’re just trying to keep relatively calm and in the same trading range we’re in at the moment,” he said. “I don’t see a reason for that to change in the near-term. The second wave of COVID shutting down stuff – I don’t think you’re going to see the U.S. shut down heavily like you are other countries, so hopefully we keep seeing our demand running for oil crushed and that that doesn’t really get affected going forward.
“But, just the headwinds from the production and export side at the moment, I don’t think are going to change. That’s going to give the market a reason to be relatively calm in the near-term,” he added.
On the demand side, Swenson pointed out that China has been making some significant purchases in recent weeks to meet the goals established in the Phase One trade agreement, however, they are still not on par with those goals.
“China has been playing catch-up, but they need to keep buying heavily to get us to where we need to be. So the big question is whether or not the U.S. is going to cut export estimates or not to try and square that off,” he said. “But they’ve been working on it and doing basically the same round of weekly purchases they’ve been doing until September to get it knocked out and I think they’re going to play it a little bit cautious going into the report, especially with the way rhetoric around China has been at the end of July as they’re kind of prepping for this round of reports.”
Not only is the rhetoric heating up, but the U.S. recently shut down the Chinese consulate in Houston, Texas, and China shut down one of our consulates over there.
“So you’re getting a little of that tit for tat argument back and forth as they’re starting to posture that we don’t want to do business together,” he said. “You have Trump saying he wanted to shut down Tik Tok, a big social media in the U.S., because he’s worried about security with China. Then at the same time, Microsoft supposedly might end up the U.S. company, or the U.S. division of it, so there’s just lots and lots of politics going back and forth around the business side of everything happening at the moment and I don’t think anyone knows which way it’s going to shake out.”
Thankfully, with the way the world is acting around coronavirus and decent demand out there, Swenson thinks China needs to keep buying from the U.S. and he doesn’t feel they’re going to take the strongest stance in the near-term.
“But we all know that China is willing to make a lot tougher decisions than we are when it comes to potentially harming their own people just to prove a point on a different situation, so you have to keep an eye out for that, as well,” he said.
As for marketing advice, Swenson said his company likes owning cheap downside protection.
“We’re buying very cheap puts around the $9 mark and it’s a way to just have a floor in place as we head toward harvest and get through the month,” he said. “So if we have bearish news and it pulls back 50 cents, well, maybe you can net out 40 of it. That’s a really good risk/reward there with not a lot of premium in the market.
“In lots of years, the puts we’re buying right now for 7-8 cents this morning are normally running 15-20 cents, and unfortunately, it’s one of the things in the market right now that there’s not a lot of risk premium out there which means we’re not in the upper $9s,” he continued. “But on the flip side it makes protecting at the money prices relatively cheap and easy in relation to other years.”
Looking at local prices, at one local elevator in west central Minnesota regularly followed in this column, as of Aug. 4, the August cash price for soybeans was $8.13 and basis was -68 cents under. October 2020 futures price was listed at $8.82 and basis was a -14 cents.