AM Markets: Will This Soy Rally Match That In Spring 2016?

(Agrimoney) –  Is January like April? That is, will soybean futures this month repeat their rally of spring last year, the last time when extreme Argentine wetness got investors worried?

Last April, Chicago soybean futures rose 12%, and went on to gain a further 18% before the rally peaked in early June.

And certainly, the flooding this time looks severe enough to be worth investors’ attention, and many believe could even prove worse than in 2016, when the Argentine soy crop ended up at 56.8m tonnes on US Department of Agriculture estimates, 1.7m tonnes below the forecast last March, ahead of the flooding.

Worse than last year?

Dr Cordonnier, the respected South America crop watcher, who overnight slashed his estimate for the Argentine soybean harvest by 4m tonnes to 51m tonnes, said that “it is probably approaching, or is worse than what we saw last April”.

After having already, last month, estimated 600,000 hectares of Argentine soybeans lost to rains, he said that now “the amount of soybean hectares impacted might be in the range of 2.0m hectares and counting, or approximately 10% or more.

“The lost hectares are some of the most productive in Argentina and once the area dries out, it will be too late to do any replanting,” Dr Cordonnier added.

After all, “even before the recent weekend rains, the Minister of Agriculture for Argentina estimated that there are approximately 2.0m hectares that are waterlogged in the provinces of Cordoba, Santa Fe, northern Buenos Aires, and Entre Rios.”

Speculators’ firepower

As to why Chicago futures in the soy complex will be affected, Argentina is the top exporter of soymeal and soyoil, implying that many buyers of these products may be forced to turn elsewhere, likely to the US (particularly for soymeal) and Brazil.

Oil World has apparently, thanks to Argentina’s plight, cut to 350m bushels its forecast for US soybean inventories at the close of 2016-17 – well below the USDA’s estimate last week of 420m bushels, which itself was well below market expectations.

And speculators would appear to have plenty of scope for buying soybeans, with their net long standing at 95,890 lots as of last Tuesday, the latest data available, less than half the peak of 210,051 contracts reached in May, during the 2016 rally.

“There is ample room for managed funds to expand soybean longs,” said Richard Feltes at broker RJ O’Brien.

For soymeal, the comparison is even more stark, with the latest managed money net long in Chicago futures and options, at 23,010 contracts, less than one-third of a May high of 75,252 lots.

Soyoil would appear less attractive on this score, with hedge funds already having a net long of 78,625 contracts, closer to an April high last year at 108,719 lots.

Big difference to 2016

Nonetheless, Mr Feltes flagged some causes for caution too, noting that in [northern hemisphere] spring 2016 the market was also worried about dryness in Brazil, which ended up causing large damage to the country’s safrinha corn crop.

“Last year’s rally was driven largely by a shortfall in Brazilian row crop production – not Argentine,” he said.

Furthermore, “trade knows that excess moisture rarely inflicts as much damage as extreme dryness,” with rains indeed often boosting yields in areas not washed out.

Profit-taking

He concluded that the potential for further fund buying, especially given the “relative youth” of the current rally, “can propel March soybean futures to the $10.96-a-bushel area”.

While a level not seen for a spot contract in six months, that would not suggest huge potential for further headway, with the March contract on Tuesday trading at $10.67 ½ a bushel, down 0.2%, amid profit-taking after a gain of nearly 6% over the previous three sessions.

Soymeal felt selling pressure too, down 0.7% at $364.00 a short ton for March delivery, after a 10.7% surge in the previous three sessions.

Soymeal vs soyoil

Indeed, it was soyoil which fared better, adding 0.8% to 35.85 cents a pound, although this had the appearance of being spurred by profit-taking on the long soymeal-short soyoil spreads which have been popular.

Open interest in Chicago soymeal futures soared 12,028 contracts on Tuesday, in large volumes, after a gain of more than 4,000 lots in the previous session.

Open interest in soyoil futures rose 4,559 contracts in the last session, also in huge volumes, after a 2,644-lot gain on Friday.

Soyoil futures also gained a little support from palm oil, which added 0.3% to 3,168 ringgit a tonne in Kuala Lumpur.

Industry data showed Indonesian exports up 7% at 2.38m tonnes last month, although whether that is bullish news for Kuala Lumpur prices, in indicating demand from importers, but potentially with Indonesia taking share from Malaysia…

Plains rains

Of course, Argentina’s weather is not just a worry for soybean investors.

“Heavy rains are also starting to raise concerns about Argentine corncrop with some acres  probably not getting in, while the market is concerned about rains impacting quality of Argentine wheat,” said Benson Quinn Commodities.

In fact, the latest rains appear to have come too late to have anything but a minimal effect on wheat, with harvest nearly 99% complete as of last week, according to the Buenos Aires grains exchange.

Meanwhile, rains in the US Plains have eased dryness fears there.

“Most of the southern Plains got 1-3 inches of moisture over the weekend, eliminating or significantly reducing drought conditions at a time of year when it usually doesn’t rain much,” Benson Quinn Commodities said.

Chicago wheat for March eased by 0.1% to $4.33 a bushel, albeit this remains among the highest levels of the past six months.

Geography factor

As for corn, it eased by 0.2% to $3.64 ¾ a bushel, but remained among its highest levels in six months, on a spot contract basis, helped by the Argentine weather concerns – although to a lesser degree.

The flooding in the South American country is seen as less threatening for corn.

Dr Cordonnier said: “Corn in the area of the flooding is taller in stature and much of the later planted corn is grown in northern Argentina which is outside of the major flood areas”

RJ O’Brien’s Richard Feltes added that “unlike last spring, there is not evidence as yet that 2017 South American corn production will be below the previous year’s output”.

‘Long-term uptrend’

In New York, cotton defied the grains by resuming forward progress, if by a modest 0.2% to 72.25 cents a pound for the March lot.

Traders at Ecom said that the recent retreat in prices, which in New York touched 75.27 cents a pound two weeks ago, “appears to be generating some physical activity with reports of sales of US cotton into the Far East gathering some pace”.

However, whether such “physical demand will be enough to put a floor in the market remains to be seen”.

From a chart perspective, prices appear in recovery mode, dating back to March last year.

“The market remains in a long-term uptrend,” Ecom said, adding that “it would take a close below 70.50 cents a pound in the near term to violate this”.