TURF WAR:
Soybean cliff or step?
Soybean prices remain a confusing picture. We expect prices to remain elevated while China is a quasi-captive buyer, then retreat thereafter. How much of the (currently) 1$ gain will prices lose?
Turf War: Soybean cliff or step?
- China appears to be enacting its commitment to hefty US soybean purchases.
- Those purchases are coming at elevated (~+1$) prices…
- …that will likely not persist once China’s obligation is complete.
- The market’s current guessing game, therefore, is when will China’s obligation reach ‘practical completion’?
- Delays to US export data make that assessment unusually difficult.
- And, a final assessment might not be available until the new year.
- US soybeans are at a substantial premium to Brazilian soybeans.
- If US prices make all the adjustment, that would imply they lose much of the 1$ trade-truce gain – not quite a cliff, but still a bruising fall.
- A lower USD-BRL exchange rate has facilitated a chunk of that US premium…
- …so FX may play a large role in the post-obligation fall.
- Oilseeds are again a microcosm of our now more complicated geopolitical and trade policy context.
Soybean cliff or step?
Soybean prices remain a confusing picture. We expect prices to remain elevated while China is a quasi-captive buyer, then retreat thereafter. How much of the (currently) 1$ gain will prices lose?
Early days for data
US soybean prices started rising in mid-October. And the bulk of the rise occurred in late October. The market looks to have somewhat anticipated the trade truce. Much of the rally preceded the US-China meetings in Malaysia and Korea. Prices have fallen from their highest recent levels, but remain about a dollar higher.
Pre- and post-obligation
The market is seeing continued evidence that China is paying up for US soybeans. The evidence, official and anecdotal, is enabling the market to keep a running total on progress towards the 12mmt obligation. For now, whether or not that target will be substantially met remains a matter of debate. However, China’s continued official purchases at these prices is a strong statement on that commitment. Of course, the market will require ongoing evidence of that commitment. Given that, next up for the market is deciding when the obligation has reached ‘practical completion’. Then the marginal buyer of US soybeans shifts from captive (less price sensitive) to commercial (more price sensitive). That shift likely means US soybean prices will fall. The question is by how much? Will it be a step down, or a larger, off-a-cliff fall?
Watching a tangled web weave
The question is not easy to answer, with US export data well behind schedule. Export sales data has been published up until just before prices started rising from their mid-October lows. The reports will not extend to the higher price period until late next week. The USDA has, though, published large sales to China. Important as those sales are, the market needs the rest of the data to assess the overall impact. The result is a couple of unknowns:
- Firstly, how much has China purchased via smaller sales below the daily reporting threshold?
- Secondly, how much have non-China sales been affected by higher prices?
The small China sales issue is opaque. Some in the market will already know of these smaller sales. And some will likely have an estimate of their sum. The issue is important to knowing when the 12mmt obligation has, substantially, been met. And, in turn, that moment is key to the timing of a likely price decline.
The non-China sales issue is similarly opaque, but the answer is even further delayed. We expect that higher US prices will cause non-China buyers to at least slow, if not halt, their US purchases. Export reports from late October are thus likely to show a period of weaker non-China sales. Lower sales through the higher-price period, though, will not be the end of the story. Those sales will be split between non-China sales lost to other origins and delayed US sales. That split will only be revealed in later reports. The balance will depend on the availability of alternative soybeans. Both Argentina and Brazil, unless they cut into domestic crush, likely have little available until next-crop soybean harvesting. And, of course, the delayed sales are partly a function of prices after China completes its obligations.
A fall that hurts
Amid all that confusion, guessing the likely post-obligation price is anything but simple. Physical price indications suggest that US soybean prices are anything from 40-70US¢/bl above Brazil soybeans. So, if US and Brazilian prices converge, and US prices did all the adjustment, that would be a hefty price fall. Such a fall is perhaps not a cliff, but it obviously hurts.
The US Dollar (USD) likely plays a part in the eventual fall. The USD has, with exceptions, been slowly creeping higher since late September. The, highly relevant, exceptions are China’s Yuan (CNY) and Brazil’s Real (BRL). The USD has slowly eased against the CNY. And, until recent days, the USD has weakened against the BRL. The latter in particular has ‘facilitated’ some of the rise in US$ soybean prices.
Wanted: a binge. Got: a drip feed.
Finally, the US government’s slow data publishing is clearly an issue for markets. The backfill is useful for both US export sales (and futures’ positions). Knowing their time path is important for understanding the price discovery path. Nonetheless, a data binge would be better than a drip feed that prolongs uncertainty. However, some explanations of the drip feed are veering towards the conspiratorial. Of course, not all conspiracy theories are false. And the truth is sometimes stranger than fiction. We, however, often find it useful to apply Hanlon’s Razor: “Never attribute to malice that which is adequately explained by stupidity”. So our default on conspiracies is scepticism. And, in this case, stupidity is perhaps unfair. The explanation might just be banal: data production takes time. The alternative, publishing data that will later need revision, seems like an unforced error. And, we suspect, the most strident critics of the drip feed would also vehemently criticise such revisions.
