Soybean Technical Picture Tells the Story

Jerry Gulke's the Rest of the Story offers in-depth markets analysis. ( Lori Hays )

It is interesting to say the least the discussion in the media regarding the tariff situation and ideas on what China has done or may yet do as this saga evolves to some sort of conclusion.  Intertwined in all this is a discussion that China really has no choice but to buy soybeans from the U.S. as South America cannot logistically supply soybeans to China and at some point, “China has to come to the US.  In the backdrop of all this speculation is the idea that the market has underestimated the global demand, including China, of soybeans.  I have heard estimates as high as 102—104 mmt (million metric tonnes) this year and another 5-8% increase next year to 110 mmt.  

 

As is so often the case, technical action (price changes) can predict fundamental changes in price direction market, and often does sometimes weeks in advance.  A case in point is that in spite of better planting weather in the Northern Plains that may indicate less spring wheat acreage going to soybeans, the ill-conceived idea that farmers will plant more corn than NASS predicts and the surprisingly low soybean acreage number of 89 mil-ac in a backdrop of a severe cut in Argentine production, soybeans have seen price deterioration over the past week or so.  Conventional wisdom would have suggested that soybean prices would have appreciated in price.   However the price action (technical picture) triggered sell signals at or shortly after the April USDA monthly report. Assuming the market in general knows more than any single entity, what is it that the market may know that many in the media do not?

 

I have expressed in person and in interviews and other columns my concern for months of a few things that the trade has not addressed.  1) Is Chinese demand indeed too lofty?  2) The unsupportive, but popular idea that China has to buy beans from us in sufficient quantities that will support prices.  3) That are naïve in using soybeans as a pawn of retaliation when in reality they really need our soybeans.  In other words, would the Chinese not really back up their rhetoric with deeds? 

 

I have been known to tell people with whom I work on a daily basis to look at a price chart until it speaks to them.  Price charts are not witchcraft or voodoo.  They are a representation of market participants who try to determine in any given point in time, a value for a particular commodity from a monthly, weekly, daily, and in the age of computers, even on a minute by minute basis. The chart below is a daily price chart for July soybeans dating back to August of 2017, remembering that each line (open, high, low, and close) is a representation of how people voted during a day on price and where the final vote was counted---the close.   This is true on a weekly basis as well and is more valid than a daily basis.  Listen to what it is saying starting back in late Aug 2017.

 

Soybean Chart, Gulke Group

 

One of the biggest scheme and device tools, in my mind, is the free DP (delayed pricing) offered by some commercial firms under the disguise of giving them the physical inventory and retain ownership for free until some point in time.  Think about it--- you have given up physical ownership of an old crop commodity and are at the mercy of a widening, artificial or valid, basis with a drop-dead date close to the beginning of new harvest at which a selling decision has to be made, or else and during a time frame where the new crop has rising production.  In a drought year, it may work well and this could be the year, but generally speaking it is fool hardy.  

 

In the case below, the last week of August was important last year as the drop dead date to finally curb ownership and sell it to the holder of inventory was August 30th.  On August 31st soybeans posted a massive reversal leaving behind the lowest price level moving into harvest of a record yielding crop.

 

By early October another increase in yield on a monthly USDA report brought the 70 cent rally to a halt only to be retested in December (another report) failing to close above the October report high, creating another sell signal for a subsequent deterioration 5 weeks of prices only to be reversed on the January 12, 2018, USDA final crop report at a price that was within 2 cents of the low posted back on August 30th.  

 

Prior to Jan 12th report, the market was viewing Brazilian acreage as actually increasing over the year previous with a total South American crop to equal the previous year’s record.  Argentine weather began to evolve and them market posted a key reversal higher, usually a significant price event and began the South American weather market.

 

Weather markets usually last about 6 weeks, give or take, regardless of the location.  In 6 weeks, a worst case analysis of the crop can be ascertained or the market has already shot beyond an economical value represented by perceived, not actual production.  In other words, it can reach a value where either demand is slowed, alternative sources sought or both.  July soybeans peaked nearly exactly six weeks later just 10 cents shy of $11.00.  The $1.25 cent rally from August 30th likely didn’t set well with those that gave up ownership.

 

July soybeans subsequently dropped back to the old Oct and Dec highs that became support one successfully penetrated on South American weather.  The retest of the $10.38--$10.40 are was like questioning whether or not Brazil’s crop had increased enough to help offset what Argentine lost and would this new plateau hold above the $10.40 level and not look back.

 

The Chinese, at 2 am in the morning saw fit to influence the market with a tariff retaliation that created a 70 cent move.  The market recovered to climb back up above the $10.40 level to buy more time and price movement. 

 

Today, April 23, 2018, the market saw fit to drop below $10.40 again to start the week.  All this in a continuous backdrop of tariff rhetoric that seemingly has calmed down somewhat while the news even on CNBC is that China has to buy beans from the U.S.  The Trump has even given out verbiage that they have the farmer’s back if China wants to use agriculture as a pawn. 

 

While the methodology varies with one’s perspective, mine suggested recently that maximum coverage on soybeans was warranted.  When negative things happen to an otherwise supportive market, action needs to be taken.  The risk was that July soybeans would rally back to close back above the post April USDA report of $10.78, and the breaking of the struggling uptrend.  Depending upon when one does pull the trigger would determine how much risk was involved in being wrong, or until such time as something changes fundamentally.  With weather opening up in the Norther Plains where I am currently visiting, and odds decreasing that spring wheat acres will be lost to soybeans, and certainly corn planters will be rolling in corn states soon, conventional wisdom suggests that soybeans would not have been lower, unless China is seen as not needing the quantities the market thinks.  

 

For questions on marketing with flexibility, or information on attending our mid-July summer conference in Beaver Creek, Co  see  www.gulkegroup.com  or contact info@gulkegroup.com or phone 480-285-4745;   707-365-0601.  

 

Jerry Gulke.

 

Catch all of Jerry's commentary at AgWeb.com/Gulke

 
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