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What I'm Watching This Week In The Grain Markets
By: Barchart | March 5, 2023

Yet again, rumors of the soybean market’s death appear to have been exaggerated. The market bounced back respectively this week after testing what has been solid support around the $14.85 level in the May contract.

While friends tell me to stop trying to figure out the soybean market, I can’t help but be drawn to it, wondering just what the heck is going on in the complex. Many—me included—had anticipated a significant sell off to take place around the first of the year once we were able to confirm the Brazilian crop was at least 150 mmt.

A crop of 150 mmt out of Brazil would be 918.5 million bushels larger than last year’s crop and provide Brazil 90 mmt at minimum, of supply available for export, with some feeling Brazilian exports could be as high as 97 mmt this year. To put that type of exportable surplus in context, the United States will export just over 54 mmt of beans this year.

It felt as though the move lower would be a slam dunk. The early start to planting in some parts of the country would make for an early start to the Brazilian export season, while continued Covid lockdowns in China would limit bean needs in the first part of the year. Analysts were all but convinced we would see cancellations of purchases by unknown and China from the US and that the USDA would be forced to adjust export projections lower.

However, no one was anticipating a historical drought to take place across much of Argentina for the entirety of their growing season. This and the Chinese government abruptly dropping Covid restrictions prompting a sharp increase in demand expectations, have changed the dynamic of the global bean market, creating sharp inversions and interesting cash market developments.

Much of what happens in the futures market is influenced by developments in the cash markets, which is why I watch what is happening in the cash markets around the world most when it comes to helping determine what I think might happen next in a market.

Basis and spreads are heavily influenced by what’s taking place in the physical space as they work to encourage or discourage movement of product. Basis tends to be more of a trickle-down factor in the market structure with the strongest value in the region setting the market and logistics having a say in much of the rest.

Spreads function similarly to basis, but on a much larger scale as an elevator or commercial manages their selling decisions based on their exposure to spreads, or the trades they made in anticipation of market moves. When an elevator buys physical grain they sell corresponding futures on the board, maintaining a short position until the physical grain is sold, and a long futures position is exchanged to offset the sale.

If the physical grain is not sold and the elevator is maintaining a short position in a futures month ahead of an inversion they have two options, sell the grain against the futures month their position is in risking weaker basis or roll their position and take a loss on the spread with the idea basis improvements will offset that loss when the grain is eventually sold.

Inversions are an indication of a bullish market setup as the structure is working to encourage grain movement in the front half by making it costly to hold those physical supplies into the inverse, while also trying to elevate nearby prices enough to make end users go more hand to mouth in the short-term.

What’s been most interesting the last couple of years though is the sharp inversions that we’re seeing in the soybean meal market structure combined with growing demand for vegetable oils due to renewable fuel expansion has kept crush margins elevated. Elevated margins are keeping the world crusher doing everything they can to capture as much nearby margin as possible.

This has been evident not only in cash market bids across the US, but has been seen in Chinese buying that seems to only be aggressive for owning beans no more than 6 weeks out.

This dynamic has had an interesting influence on the market especially recently, as the slow start to Brazil’s harvest and the drought in Argentina decimating much of what would be the earliest soybeans to arrive to the market has kept the US export program functioning far longer than what we would normally see.

As it stands currently, the Chinese crusher is thought to be mostly covered for March movement, with 60% of their April needs covered. This week rumors hit my inbox of China buying US beans for April/May shipment, something that would make zero sense when looking at market value alone as Brazil is 90 cents cheaper than US values, but with Brazil’s port capacity all but maxed out recently and margins remaining positive, it is not entirely impossible.

To meet USDA export projections, we need to ship the soybean bushels currently on the books as well as sell an additional 9 million bushels or so of beans a week to finish the year, something that looks increasingly likely to happen—and just one more piece to the bullish puzzle buyers say is being put together in the bean market.

Here’s the deal though, that additional supply out of Brazil is still there, though it may currently be pent up. They will have an additional 478 million bushels of projected exports above a year ago, 13 million metric tons of additional exports according to the USDA, two extra months’ worth taking recent pace into consideration.

If the wheat market has taught us anything this year, it should be that eventually a significant growth in exportable supply out of a supplier means the rest of the world has to get on their level when it comes to values or lose out.

Interior basis levels in Brazil right now are historically low, with just over a third of the overall crop harvested. Storage shortages are already being reported, with basis values as low as $2.50 under reportedly being offered to farmers in parts of Mato Grosso. While freight and limited space is behind the cheap values currently being paid, the levels will have a long tail when it comes to values able to be offered into the world market later in the year, something that could have a huge impact on domestic values offered if we get to where arbitrage works into the US this summer.

The crop loss in Argentina is substantial and probably the greatest we’ve seen since the 2008/2009 crop year, however the production growth in Brazil and neighboring countries cannot be ignored. Argentina will be able to import beans, strong crush margins will make for all kinds of interesting moves, but the tax implications and market needs will get beans flowing to where they are needed, keeping Argentina’s overall supply of meal into the world reasonably stable for the most part.

In times of shortages in a physical market, the bushels never get to where they are needed quickly enough but the market’s job is to incentivize it happen as fast as possible—hence the continued strength in futures and the inversions we’re seeing across the board.

In other news, but on the topic of basis, spreads and futures. Rumors this week quickly circulated that China is back buying US corn. Traders initially said around 1.5 mmt of corn was sold to China out of the PNW midweek, though a lack of a USDA flash sale announcement started to bring that into question. An unnamed Bloomberg trader was quoted saying the actual amount was closer to 300,000 metric tons, less than anticipated but Chinese demand is Chinese demand.

Moves in freight, basis and spreads confirmed the business was done, though it may be weeks before we learn just how much was actually sold. Continued updates to the Brazilian corn production outlook will likely dictate how much additional business we are able to get. China needs to buy an additional 4 mmt of corn give or take to get us close to the estimated demand projection from the USDA, so this space will have to be watched closely.

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