- The Game of the Week is pin-the-tail-on-the-donkey as to who can come closest to USDA's next guess on Brazilian soybean production.
- The reality is the number doesn't matter, for the market is already telling us what it thinks about supply and demand.
- The latter is the key, as demand for US supplies is not increasing and futures spreads are trending back out of bullish territory. This tells us all we need to know.
With the next round of USDA data dump set for release this coming Friday, one of the topics getting the most coverage is what the guess will be for Brazil's soybean production.
- Last month the guess came in at 161.0 mmt, as compared to November's 163.0 mmt
- and the previous year's "final" 160.0 mmt, which I think was record large
All the pre-report nattering is about USDA lowering its guess to 150 mmt. Or 140 mmt. Maybe 130 mmt. Or lower. What do I think?
I don't care. It doesn't make any difference. What matters is what the market thinks, and that's where the daily chart for the May-July soybean futures spread comes into play.
When we think of the Brazilian crop and the soybean futures market, harvest is either well under way or nearly wrapped up by the end of February, just as the March issue (ZSH24) heads into delivery. We can still get a read on what the commercial side thinks of Brazilian production by tracking the March-May futures spread, though it is the May-July that takes it one step further and shows the expected ripple effects of Brazil's crop on demand for US supplies. As of this writing, the May-July futures spread was at a carry of 8.25 cents and covering a still bullish 26.5% calculated full commercial carry (with 33% the threshold).
However, this spread has changed over the course of the winter after closing at a high of 2.0 cents carry on November 14 (the equivalent of mid-May in North America). The spread abruptly fell to a low of 8.25 cents carry as rains moved into some of the driest growing areas across central Brazil, a pattern that continues to this week. Has it dramatically changed Brazil's production potential? Again, I do not care.
What we can see though is it is cooling the idea of a later than normal increase in demand for US supplies. The US typically ships 70% of its total exports by the end of February, 6 months into the new marketing year, with Brazil taking over once its harvest makes its way to port (and port workers have gone on their annual strike). This year, though, total sales have been running 15% to 20% behind last year's pace, raising 'hope' (a 4-letter word in markets) demand would be backloaded due to a smaller Brazilian crop.
With the carry strengthening in both the March-May and May-July futures spreads, that hope seems to be fading. From a technical point of view, if the May-July takes out its previous low daily close of 8.25 cents carry, based on the idea of the Down Escalator Simulator[i] we would expect an extension of the downtrend to the same level the March-May spread is trading at. As of Tuesday’s close, this was 10.25 cents and also trending down. Eventually, it would not be surprising to see the May-July futures spread cross the bullish threshold back into neutral territory. Partly because of Brazil’s crop, whatever it turns out to be, but more due to a lack of demand for US supplies (slide 2).
The bottom line is the US isn't facing a supply issue, but rather a demand problem. Something to keep in mind during 2024.
[i] The Down Escalator Simulator: Futures spreads tend to move to levels previous spreads showed at delivery.
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.
