Has the Soybean Market Bottomed?

• Technically, it looks like some aspects of the soybean market have put in a bottom based on reversal patterns on weekly and possibly monthly charts.
• However, the three key reads on real market fundamentals don't agree, continuing to show a bearish at worst to neutral at best situation.
• How do we break the tie in the two opinions? By applying Newsom's Market Rule #6.

Has the soybean market bottomed? That seems to be the hot question as we head into another weekend. Of course, the talking heads who say everything is always bullish have responded to the query with a resounding “Yes!”. Unfortunately, this gives me more doubt to the idea of nothing but blue sky ahead and creates a more likely ‘Dead Cat Bounce’ scenario. Those squawking the loudest about nothing but rainbows and lollipops in the market’s futures are looking at it from a technical point of view. I can see this argument based on intermediate-term and even long-term charts. Mostly. But there is a lot that can still happen in March. 

What most soybean bulls don’t want to acknowledge is the fact markets have two sides: Technicals and fundamentals. When I talk about fundamentals, I’m referring to the three reads on REAL fundamentals that have nothing to do with the imaginary numbers USDA releases every month, quarter, and so on. These three reads are: 

• The National Soybean Index, the national average cash price and intrinsic value of the market. 
• National average basis, the difference between the NSI and nearby futures contract. 
• Futures spreads, the price difference between futures contracts the usually act as a defensive mechanism for commercial traders against noncommercial-led activity. 

Let’s start with the National Soybean Index (ISYY00). As I’ve talked about in the past, this key fundamental read completed a long-term bearish technical pattern at the close of April 2023, a pattern than projected a low monthly close of $10.25. At the time the NSI was priced near $14.00. Fast forward to the end of February 2024 and the NSI was calculated at $10.80, within sight of its downside target (if your sight can see 55 cents down the road). What would the ramifications be if/when the NSI falls to $10.25? First, it would put available stocks-to-use (Again, I’ve talked about this a number of times. It has nothing to do with USDA’s imaginary supply and demand estimates that many use to calculate a fictional ending stocks-to-use figure each month.) at a whopping 14.3%. This would be the largest as/u figure since the end of October 2020 when the NSI was priced at $10.06 with as/u at 14.8%. 

As I talked about last time, national average basis plays a number of important roles in understanding markets. In the case of soybeans, basis remains neutral-to-bearish despite the selloff in the futures market. My latest calculation came in at 57.5 cents under May futures as compared to last Friday’s final figure of 57.75 cents under May. Historically, this week’s average weekly close is 42.5 cents under May futures with the previous 5-year low weekly close at 87.0 cents under May. For our “Fun With Numbers” segment, this means the latest basis reading is 15.25 cents below average but 29.25 cents above the weakest it has been. While still clear as mud, the one thing we do know about soybean national average basis is it isn’t bullish. Merchandisers are not having to push the cash market to source enough supplies to meet demand, confirming what we see in the growing as/u calculation mentioned above. 

I’ve been keeping a close eye on the May-July soybean futures spread over the last couple months. There is so much arguing over the size of Brazil’s crop, Chinese demand, and the combination of those two eventually saving the US market, that we need a reliable read with the ability to block out the noise. This is what the May-July soybean spread provides. By the time the end of February rolls around and the March futures contract moves into delivery, global commercial traders have a good idea of what Brazilian production was and/or is each year. If Brazil’s crop is small, there is a better chance China will eventually come knocking on the US door for increased secondary supplies. If Brazil’s crop is large, then hope of Chinese buyers showing increased interest is dimmed. 

This year, the May-July futures spread has seen its carry strengthen from 4.0 cents carry at the close of business on December 26, 2023, and covering 12.5% calculated full commercial carry (with 33% or less considered bullish) to a carry of 10.5 cents and covering 25.5% cfcc at the end of February. While still in bullish territory, the stronger carry indicated the commercial side was growing more comfortable with the US spring supply and demand situation given what it knew about Brazilian production[i]. The first half of March has seen the carry continue to strengthen, closing Thursday, March 14 at 14.5 cents and covering 48% cfcc. Note the spread is no longer bullish, but neutral. For it to cover a bearish level of cfcc the carry would have to strengthen to roughly 20.25 cents, a target that recently doesn’t seem so far away. 

Is the soybean market bullish? Technically, yes. Fundamentally, no. How do we break the tied opinions? Newsom’s Market Rule #6 tells us: Fundamentals win in the end.

[i] A side note: Does it matter USDA and CONAB disagree on the size of Brazil’s crop? Not at all. The only thing that matters is what the market is telling us. 

More Grain News from Barchart

• Beans Backing Off in AM Trade
• Wheat Firm into Friday
• AM Corn Market Fractionally Red
• Corn Flips back to Net Red for the Week on Thursday

On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.