The list of negative fundamentals continues to grow as prices move lower. Here are five of the most dominant market factors that have been negative for prices in the last three months.
The record U.S. soybean crop has filled the domestic and global market for the next six months.
South America is off to a great start. The current projection is for a 16 million metric ton crop, or about 600 million bushels larger than last year's crop.
U.S. exports are slow and falling behind last year's pace.
Soybean meal has a lot of competition. We have competition from South American and Indian meal in the global export market. Supplies of dried distillers' grains also continue to increase as more ethanol plants process corn. And large supplies of meat and bone meal are trading at a large discount to U.S. soybean meal.
Palm oil supplies are plentiful and trading at a discount to U.S. soybean oil prices.
Added together, you can see why soybean prices are trading at some of the lowest prices farmers have seen in the last decade.
The job of the futures market now is to get soybean meal and soybean oil prices low enough to stimulate demand in existing markets and find new markets for soybean meal and soybean oil.
This is already starting to happen. Broiler and egg set is consistently showing a 2-4% increase each week in USDA reports. Hog numbers are increasing and several new biodiesel plants are under construction throughout the Midwest.
Economics also dictate that if prices fall low enough, production will begin to slow. Look for U.S. soybean acreage to drop in 2005. Brazil and Argentina crop plans are in place for this winter, but odds are good we'll see limited expansion in Southern Hemisphere oilseed acreage in 2005-2006.
Trade has been focused on the huge supply, but demand is also very important.
China is the key for demand. The red-hot economic growth in China has started to slow. However, the Chinese economy and the demand for meat is still projected to increase 4-5% in 2005.
If China can avoid a hard landing (a major recession), odds are good they'll again be active buyers in the global soybean export markets next spring and summer. With the current high international ocean freight rates, look for U.S. farmers to stay at a competitive advantage with additional export shipments from the West Coast.
When will prices be low enough that prices finally bottom? It takes time, but price and market economics work. As the saying goes: The cure for high prices are high prices, and the cure for low prices are low prices.
The price rationing process kicked into high gear quickly this year when soybean prices surged above $10. Now prices are low and with the global economy growing, demand for food is increasing as well. In July 1999 when the U.S. soybean futures market fell to just $4.01/bu. the U.S. dollar was at 102%. With the current dollar value, international prices will be at the same bargain-basement price level if prices fall to $4.84/bu.
Trend Change Signals
What will signal that prices have bottomed? These are three indicators that grain traders watch:
Watch the alignment of the futures market. When the trend changes from down to up you will often see nearby futures go to a premium to the differed contracts. This bull spreading can occur even as prices move lower, but it's often a good signal.
Watch for a weekly close above the two previous weeks' highs by the nearby soybean futures market because it could signal a major low.
Watch the 40-day moving average. When prices close above the 40-day moving average, commodity funds will likely cover their huge short position and begin to go long.
This has been a year of extremes. The soybean market rose to more than $10/bu. from April to May.
From May to August, prices fell by more than $4/bu. Now with the cheap dollar and increasing demand, watch for any weather scares that threaten the South American soybean crop or the U.S. soybean crop from March to July 2005 to send futures prices sharply higher. The key as producers again learned in 2004 is to not only get cash soybeans sold on that rally, but also to get some new crop priced ahead.
If you're willing to sell into an up-trending market you won't have to sell when prices collapse.
Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want more information, write: Northstar, 1000 Piper Jaffray Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail: [email protected].