There is often nothing like a trend being observed to stop it in its tracks, in financial markets as well as playground games such as grandmother’s footsteps.
A similar concept, in economics, is behind Goodhart’s law, that “any observed statistical regularity will tend to collapse” when it is promoted for use as a target measure.
So it was on Wednesday in the Chicago soybean market, which observers other than Agrimoney.com have noted appears to be taking a lot more notice of prices in China, the top importer, these days, rather than just vice-versa.
The Chicago soy market, “more than any time in recent memory, is increasingly driven by overnight Dalian trade reflecting China’s leading role as the top soy importer,” said Richard Feltes at Chicago broker RJ O’Brien.
Chicago vs Dalian
With best-traded May soybean futures trading 1.0% higher to 4,237 yuan a tonne overnight on China’s Dalian exchange, this observation would suggest a strong start to peers in Chicago.
But Chicago soybeans for January stood just 0.1% higher at $10.48 ¾ a bushel as of 10:15 UK time (04:15 Chicago time), having spent much of overnight trading in negative territory.
And Chicago soymeal for January was flat at $321.90 a short ton, underperforming a 0.6% rise to 3,115 yuan a tonne in its peer on the Dalian exchange, where prices reflected another potentially bullish observation by Mr Feltes, of “an inverted Chinese cash soymeal market”.
In futures too, near-term lots hold a premium to those further away, with best-traded May soymeal, for instance, gaining 0.4% to 2,945 yuan a tonne on the Dalian.
This inversion comes “despite a 5.1% increase year on year in China’s October-November soybean crush, which if applied to the balance of 2016-17, applies soybean imports of 87.4m tonnes”, 1.2m tonnes higher than the US Department of Agriculture’s current forecast.
Such calculations bode well for US exports, Mr Feltes said.
“Given the recent stepped-up pace of Chinese soy buying, it is reasonable to assume that Beijing may take 32m tonnes of 2016-17 US soybeans,” rise of some 2m tonnes year on year.
“Given known US soy sales to China, in addition to assuming that 55-60% of unknown US soy sales that will eventually be designated to China, Beijing only needs to buy [a further] 5m tonnes of US soybeans for 2016-17 from now through August” to meet the USDA forecast for full-season sales.
And this when worries over Argentine dryness are adding to bullish soy sentiment too,
“Dryness in Argentina is getting more headlines with forecast dry for Buenos Aires for the next week,” said US broker Benson Quinn Commodities.
“Some weather services are forecasting that Argentina may see 45-60% less-than-normal rains for December-January.”
Soybeans vs corn
However, there is a limit to amount of buying that such assessments will fuel, especially when weather is not so bad elsewhere in South America.
“Dryness in Argentina is a concern, but excellent conditions in Brazil may dampen the impetus to push prices higher,” said Tobin Gorey at Commonwealth Bank of Australia.
Furthermore, soybeans’ price resilience has left them looking expensive compared with grains, ie at levels likely to incentivise farmers to grow more of the oilseed next year, at the expense of the likes of corn.
The much watched November 2017 soybean futures-December 2017 corn ratio stands at 2.65, well into territory favouring sowings of the oilseed over the grain.
‘Earlier the better’
Indeed, corn hardly helped its case by falling by 0.3% to $3.88 ½ a bushel for the December 2017 lot, while the best traded March contract eased by 0.3% to $3.59 ½ a bushel.
Price hopes have been undermined in part by a double impact of decent Brazilian sowing conditions.
Corn output there is likely to benefit both directly, in terms of the main crop currently being planted, and indirectly, through the fact that rapid soybean sowings imply a timely harvest early in 2017, and then large plantings of the follow-on safrinha corn crop within the ideal window, which ends in February.
Brazilian farmers will, given the early soy harvest, “have the confidence to plant big safrinha crops,” Mr Gorey said.
“The earlier the safrinha corn is planted the better.”
Further pressure on corn prices is coming from ideas of US farmers stepping up the pace of sales whenever futures rally, as they did earlier this week.
“Producer selling has been noted this week with the rally back near the high end of the trading range,” Benson Quinn Commodities said.
Furthermore, the USDA is expected, in its Wasde report on Friday, to nudge higher by more than 1.0m tonnes, to 219.2m tonnes, its forecast for world corn inventories at the close of 2016-17.
That estimate factors in ideas of an upgrade of 1.2m tonnes, to 84.7m tonnes, in Brazilian corn production hopes,
The Wasde is expected to lift the forecast for world wheat stocks at the close of 2016-17 too, by 1.1m tonnes to 250.3m tonnes, reflected improved ideas of Canada’s and, in particular, Australia’s harvests.
Both have been already upgraded this week by domestic officials.
And fears for weather damage to the US crop are receding too.
“Weather forecasters continue to expect snow to precede sub‑zero temperatures in vulnerable US hard red winter wheat regions,” Mr Gorey said.
“With enough snow we will be able to scratch this region off the watchlist.”
Black Sea freeze
That said, there are some worries over crops too in the Black Sea region, which is bracing for its coldest spell of a cold snap, with temperatures set to reach -15 Celsius “a wide part of North Ukraine and in the Central District of Russia,” Agritel said.
“Local operators are concerned about the consequences of this climatic conditions on the crops,” the consultancy added.
However, with the drop in temperatures being quite gentle, and “thick enough snow cover most affected regions, damages should be limited”.
Chicago wheat futures for March stood down 0.4% at $4.05 a bushel, although above a low of $4.03 set earlier.
(Source – http://www.agrimoney.com/marketreport/am-markets-soy-rally-stalls-as-goodharts-law-concept-bites–3876.html)