What Could Cause a Soybean Rally?

U.S. producers are set to harvest a record 88.7 million acres of soybeans this year, just as South American farmers are coming off of a blockbuster season of their own. But before you throw up a white flag in frustration, be aware of the technical and fundamental factors that could bring prices back to life.

One challenge is the sheer abundance of grain that producers in the U.S. and abroad bring to market.

“Because we’ve done so well in the grains, we’ve had a cap on them,” says Mike Florez, founder of Florez Trading. When prices do swing higher on a production shortfall, they tend to pop skyward more quickly than they did 10 years ago. “There’s a multiplier effect,” he says.

Strong demand is a bright spot for grain producers, agrees Brian Basting, economist at Advance Trading. Most farmers are aware China buys soybeans in bulk, but fewer producers know Southeast Asia countries such as Indonesia and Malaysia also are prime buyers of soybeans and soy meal for feed.

“That might boost prices if demand is higher,” Basting says. But he cautions: “If the Brazilian farmer lets go of soybeans, it might short-circuit interest in U.S. soybeans.”

If prices are able to break above $10 on the monthly chart or $10.28 on the weekly chart, producers will have “pretty good confidence the market is going higher,” Florez says. A big crop out of South America could push prices toward $8.

During the 2016 harvest, U.S. producers sold 50% of new-crop soybeans off the combine, Basting says. This year, reports he’s heard suggest some farmers are being less aggressive about shipping soybeans off-farm. “There’s a lot of variability out there,” Basting says. “I think at this point all we can do is let the combine tell the story.”

Producers must defend their balance sheets, Basting says, whether they buy put options on bushels not being sold or use a call purchase against soybean sales.