With planting completed, the soybean market is now turning its attention to weather and crop conditions. In the U.S., there is also some concern about the Phase One trade agreement with China and whether or not they will be able to fulfill their commitments.
“The big picture issues right now are how big is the crop going to be and what is China going to do?” said Frayne Olson, grain marketing economist at North Dakota State University. “Obviously, China’s purchases of soybeans is a much bigger deal in the soybean market than in the corn market. It’s big in both markets, but China is the dominant buyer of soybeans in the global market.”
At this time there’s a lot of focus back on China and whether they will fulfill the Phase One trade agreement. The Chinese have been buying a lot of soybeans from South America lately, in particular Brazil, which had a “massive” crop this year. But China has also been buying some U.S. soybeans to fill in.
Olson explained that the Phase One agreement actually has eight chapters and seven of those are focused on trying to make long-term trade easier. Those chapters are geared toward removing some of the barriers that China has put up for the movement of U.S. products into the Chinese economy. The one chapter that farmers and marketing guys are focused on is the Chinese purchases.
“It’s one chapter, but an important one,” Olson said, adding that many people feel the Chinese aren’t at the pace that was expected. “One thing to remember is Chinese purchases of ag products, primarily soybeans, but also for corn and wheat, are very seasonal. China doesn’t come in to buy large volumes of soybeans until close to harvest. They tended to come in the August/September time period and started to ramp up purchases.
“But there’s still time. I was always anticipating that China would not come in with really big purchases, based on their past buying habits, until that August/September time frame to be more aggressive in their purchases,” he added.
The market was anticipating that if the agreement says China had to increase purchases substantially, then there would have been more purchases by this time.
“I’m looking at it saying, ‘Well, maybe yes, maybe no,’ because they’re still getting a lot of their product out of South America, and in particular, Brazil,” he said.
As a result, there’s a bit of anxiety in the market right now.
The general consensus, according to Olson, is that there’s still some political turmoil surrounding it, but the message that’s being sent from both the U.S. and China is that China will fulfill their commitments.
“With that in context, they will have to start getting aggressive in buying U.S. ag products, which will include soybeans as there is a specific target for that,” he said, adding there will also be some corn, sorghum, DDGs, and possibly some ethanol, which would be supportive to the corn market.
The other thing that’s happening in China is there are more and more reports that they’re being aggressive in trying to rebuild their hog industry, Olson noted.
“The African swine fever is still an issue for China and the Chinese pork industry, but they’ve got part of it under control,” he said. “It’s not disappeared, but they’re doing a much better job of controlling the spread. So they are being fairly aggressive, trying to rebuild their hog industry to repopulate and that has had an impact on demand.
“That’s a positive thing,” he continued. “The fact that the Brazilians have this monster crop doesn’t help us, but the fact that they’re rebuilding their hog herd should help us with some of the demand base.”
The other main things that the traders, analysts and forecasters are all enamored with right now is the weather forecast and crop conditions, according to Olson.
“We’re now starting to move into some of those critical time periods for the crops in July and August and people are doing their modeling and forecast to project what kind of yield potential we have out there,” he said.
The big focus, right now, is on the supply side of the equation – weather and crop conditions.
A lot of folks follow the weekly crop progress reports and crop condition ratings, but Olson wants to make sure that farm managers understand what that really represents.
“It’s about the only reference that a lot of the national and international traders have on what’s happening in each of the states,” he said. “Even though it may not be as accurate – and I know a lot of farmers question the numbers as far as condition ratings and what percentage of the crop is in good-to-excellent – but for a lot of the hardcore marketing guys that’s the only reference they have because they don’t have the contact or network with what’s actually happening on the ground.”
Olson says there are respondents or enumerators that report every week. A lot of times it is county agents that will fill it out and send it in, or sometimes it is county level FSA personnel who will do that and give a visual analysis. Those people will ask farmers what they’re seeing, whether there are problems developing, etc.
“To use it accurately, what works best is watching how crop conditions change from week-to-week,” he said. “When you start looking back long-term, saying ‘At this time four years ago the crop condition ratings were similar and this is the kind of yield we got.’ Well, that’s kind of dangerous. There are folks out there, including academics, that try and do that, but understand it’s a very subjective rating. Getting the best use of that, I think, is looking at what happens crop condition-wise from week-to-week-to-week: Is the crop improving? Is the crop slipping, getting worse? And we’re now entering this critical weather stage.”
Regarding the Planted Acreage Report, the market will have to wait to see how many acres of soybeans actually got planted. The soybean plantings were up from last year, but last year was a very rough year for soybean plantings. The fact that the Prospective Plantings Report said there was going to be an increase in soybean acreage is not surprising. But if you look back two or three years ago, they’re still down significantly from the peak.
“On the Quarterly Stocks Report, we’re going to get a good idea on how many soybeans are still left in the system. How many soybeans are stored on the farm? How much is in the commercial supply chain right now? That will also give us a better read on our potential ending stocks,” he said.
At this time, the weather forecast is more focused on corn and the size of the corn crop than it is on soybeans. But as we get into August and soybeans reach the flowering and pod setting stages from a crop development standpoint, it will become more and more critical.
Looking at prices, both corn and beans have been in a trading range for the last couple weeks.
“It’s been kind of a quiet time period relative to what we came from, which is kind of nice for us to take a breather,” Olson said. “But I do think things are going to start getting a little bit more exciting as we get into the summer months and people start focusing a bit around how big the crop might be.”
From a farmer marketing standpoint, there are some areas in the region where the elevators have some very attractive basis levels for harvest delivery, in particular on soybeans, but also on corn. Basis levels, he explained, is that difference between the local cash price and futures market price. Normally, that price differential at harvest for soybeans is $1.10-$1.20. Depending on where one is in the region, there are some elevators that are offering a minus 60-70 cents right now.
“What that’s signaling is that the elevators are a bit concerned about their supplies at harvest,” he said. “One of the things farmers need to understand is our supply chain is actually very efficient, but has to be coordinated. It takes planning to get grain moved as efficiently as possible at the lowest cost. Right now, the elevators are trying to plan out their transportation needs, trying to book and confirm shuttle trains.
“There’s a real strong incentive, if you’re the farmer, to contract for delivery at harvest, knowing that those bushels are going to arrive. “There’s a big advantage to not only the local elevator, but also the exporter,” he continued.
“One of the things to think about,” he explained, “is to sign a basis fixed contract where essentially you lock in the basis and say, ‘Alright, here’s the basis for harvest delivery and lock that in,’ and then let the futures market go up and down so you lock in the futures price later on.
So if you’re anticipating that prices will start to recover a little more as we move into the summer months, you lock in the basis right now and you’ll get that good, favorable differential. You let the futures market move and then lock in the futures market later.”
Farmers will still have to monitor the futures market and do the other part of locking the price in and they’re still at risk for that because prices could still go up or down depending on a lot of factors.
“I just want to point that out to farmers – to be looking for opportunities to lock in some deliveries at harvest,” he said. “The local marketplace, at least in some areas, is providing a very strong incentive to help with that coordination function to make it that there’s enough that they have some guaranteed bushels that will hit the elevator at the right time.”
Looking at local prices, at one local elevator in west central Minnesota regularly followed in this column, as of June 23, the July cash price for soybeans was $8.17 per bushel and basis was -55 cents under. The September 2020 futures price was listed at $8.76 and basis was -4 cents under.