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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 
mid-February. 

   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 
differential. 

   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 
Friday mornings on our DTN subscription products such as MyDTN. To find out 
more, visit http://www.dtn.com/industries/agriculture/ 

   Darin Newsom can be reached at darin.newsom@dtn.com  

   Follow him on Twitter: http://www.twitter.com/DarinNewsom


(BAS/BE/GH)

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