Newsom on the Market 05/18 10:51
Lies, Damned Lies, and Soybeans
A couple of thoughts from Mark Twain help me explain the situation in
soybeans the past week or so.
By Darin Newsom
DTN Senior Analyst
The last week (actually just over a week if you go back to Thursday, May 10)
has been extraordinary, considering all the "lies" and "damned lies" (thank you
Mark Twain) regarding soybeans. In times like these, a person has to have rules
to follow, or they will get run over by rumor and misinformation.
Let's start with the May round of USDA reports -- you know, the ones that
include the government's "initial" (actually third) look at new-crop supply and
demand. In May, USDA's next first guess of 2018-19 U.S. ending stocks of
soybeans came in at 415 million bushels (mb), down from the 460 mb it released
in its major presentation at the much ballyhooed Outlook Forum in late
February, but more than the 376 mb calculated in its baseline report from
As we all know ending stocks are derived by subtracting total demand from
total supplies, simple enough, but this is where the problem is.
Total supplies consist of beginning stocks, production and imports. Of these
three inputs, USDA has actual, indisputable data on... none of them. The best
it can do on imports is to average the past year's final numbers, ignoring for
the time being the muddied global trade waters (more on that later).
Production is the result of national average yield, subject to change by the
unknown weather variable, times harvested area, which itself is the result of
an unknown number of planter acres, times the average of a variable
From this actually unknown total supply figure, USDA subtracts an equally
unknown figure of total demand. Remember the muddied global trade waters I
mentioned earlier? Now throw in the much discussed, but still unclear amount of
damage, done to Argentina's soybean crop this past harvest, and what it
might/could mean regarding Chinese demand for U.S. soybeans. Again, I will
return to this subject a little later.
What did I leave out of the discussion of this equation? I'll give you a
minute to go back and look.
Got it? Okay. Yes, I purposely left out the subject of new marketing year
beginning stocks to discuss in more detail. As we all know, these beginning
stocks are actually the previous marketing year's ending stocks, and as we all
know, USDA has absolutely no clue, or it does and it won't actually say, what
this number is.
If we just use the previous four years of USDA domestic soybean ending
stocks monthly guesses, prior to the 2017-18 marketing year, we see that the
final quarterly stocks number released in September has averaged coming in at
53.4% of USDA's highest guess over the prior 18 months of reports. For this
crop cycle, the high guess so far has been 555 mb in USDA's March report. Last
week, this was dropped, seasonally or cyclically, to 530 mb. If the average of
the last four years holds true, the September 2018 Quarterly Stocks report
should have soybeans near 300 mb. However, if the odd-year pattern of 49%
(2013-14) and 39% (2015-16) occurs at the end of 2017-18, the September
quarterly stocks figure could be closer to 250 mb. Think for a moment how that
would change USDA's 2018-19 ending stocks guess.
The other set of lies also comes from the current Administration, or not,
depending on what the truth turns out to be. This past Monday, a story broke
that a trade deal between the U.S. and China was reached, only to be quashed
later in the afternoon by Commerce Secretary Ross, as he said something to the
effect of "the gap is as wide as it has ever been."
Late this week, Thursday afternoon into evening to be exact, another set of
stories started circulating that China had agreed to not impose trade tariffs
on U.S. agricultural commodities, including soybeans, and return paid
anti-dumping fees on grain sorghum. This, after the President downplayed "the
prospect of successful trade talks with China," stating that China has become
"very spoiled," according to one news source. My response to the DTN staff when
I saw the story was that a deal had likely been made. Just because.
So with all the untruths and misinformation swirling around the soybean
market these days, how do we know what's what? It comes down to following
simple rules to eliminate the noise.
The first of these is to not get crossways with the trend. Most of you know
I spend a great deal of time discussing trend (price direction over time),
because it indicates what the flow of money is doing in a particular market.
The minor (short-term) trend on daily charts for both old-crop July and
new-crop November soybeans are nearing upturns after testing short-term
technical price support earlier this week. On the other hand, secondary
(intermediate-term) trends on weekly charts have turned down for both old-crop
and new-crop, indicating (and confirmed by weekly CFTC Commitments of Traders
reports) that investment money is flowing out of the markets. Lastly, the major
(long-term) trends of futures and cash remain sideways, though some would argue
sideways-to-up is more fitting.
The second rule is just as important: Let the market dictate your actions.
Here I'm talking about what we can tell about fundamentals by looking at
futures spreads and basis. If we focus on futures spreads, the old-crop
July-to-August is still neutral, but trending down (strengthening carry). This
would suggest old-crop fundamentals are growing less bullish -- more bearish
than before, but certainly not to the tune of 530 mb of domestic ending stocks.
However, the weak carry of the new-crop November-to-January futures spread
remains bullish, indicating that the 2018-19 ending stocks situation could be
much tighter than USDA's "initial" guess of 415 mb.
I'll close this column with another quote attributed to Twain (Mark, not
Shania), "Truth is stranger than fiction, but it is because fiction is obliged
to stick to possibilities; truth isn't."
Editor's Note: We're sharing this week's Newsom on the Market commentary
from DTN Senior Analyst Darin Newsom in our Top Stories segment across all
DTN/The Progressive Farmer platforms. Newsom on the Market regularly appears
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more, visit http://www.dtn.com/industries/agriculture/
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