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MARKETS OUTLOOK

The other side of the story


In all intellectual debates, both sides tend to be correct in what they affirm, and wrong in
what they deny.
-John Stuart Mill

By Pedro H Dejneka,
AGR Brasil, AgResource

With vast
speculation taking
over the commodities
sector since early
March giving
way to historical
vertical-like price
moves, there has
been a race to
try and matchup
fundamental
reasons to justify the
rally.

As enlightened as such statement by what Stanford University calls the most influential
English speaking philosopher of the 19th century is, one could easily make an argument that
when it comes to commodity market analysis the statement seems to be as useful as a bicycle to a
fish.
In the world of commodity analysis, there seems to be a constant attempt to prove the
unprovable on the part of the trade.
With vast speculation taking over the commodities sector since early March giving way to
historical vertical-like price moves, there has been a race to try and matchup fundamental
reasons to justify the rally. It seems as though even the best and brightest get caught in this game
of cat and mouse. Significant changes to South American soybean crop totals as well as intense
early year demand by the Chinese and now, more than ever, speculation over the potential for
drought-like weather conditions for the U.S. crop, have indeed provided some much-needed fuel to
the soybean market in Chicago.
These conditions have given way to heavy speculation about U.S. and South American balance
sheets, which has been exacerbated by the lack of significant data-points between late March and
early July, creating a true free-for-all in balance sheet estimates.
The dominant feature of this past month in many insider comments and analysis has been the
extrapolation of Chinese demand pace and of cuts to South American production with 15/16 and
16/17 U.S. soybean balance sheets. Two things are very interesting to note:
1: The trade seems ready to simply assume that U.S. yields will be, at best, trend. Many
analyses we have come across recently show yield scenarios going only down from 4646.5 bpa. Such is the power of the El Nio to La Nia effect in peoples psyches. Yes, the
weather has been drier than normal and hotter to much hotter than normal in parts of the U.S.
Midwest, however, it is indeed only June and crop conditions in soybeans are at the highest
level ever for this time of the year.
2: The use of constant demand figures under different yield and total production scenarios. This
one is astounding as it completely throws out the basics of supply x demand law, assuming
demand for U.S. soybeans as completely inelastic.
Well we beg to differ and as you can see by the attached table, doing our best to try to show
both sides of the story.
Note that only yields nearly 10 percent below trend would seem sufficient to take soybean endingstocks in the United States near or below the 200 million bushel and 5 percent stock-to-use mark.
Such levels would still be around 2x the level of ending stocks in 2014/15, when soybean prices
peaked near $10.60. Yields near or above trend, even with unchanged soybean planted area,
would take stocks to much more comfortable and near historic levels of 400-500 million bushels
(translation: 400+ million bushel stocks do not inspire the need for rationing of supply through
higher prices).
But you are using demand numbers that are too low given the cut in South American production
in 15/16 and the pace of Chinese demand!
Ahhh, we were hoping you would make such comment.
We caution against extrapolating demand switches to the U.S. for the 16/17 crop year due to cuts
in 15/16 to the South American crop. One must keep in mind that by late February of 2016, Brazil
is locked and loaded to supply soybeans to the world. Furthermore, South American production
in 16/17 is likely to have a new record potential, even with the expected slight reduction in

86 | September 2016 - Milling and Grain

16.17 US SOY BALANCE SHEET


Under different weather/area scenarios
Soybeans

Bad
Weather

Moderate
Weather

Favorable
Weather

Bad
Weather

Moderate
Weather

Favorable
Weather

AREA UNCHANGED
INCREASED IN AREA
Argentinean area dedicated to soybeans.
Planted
82.2
82.2
82.2
83
83.5
84.5
AGR BRASIL currently sees the following for 16/17
production potential (in MMTs):
Harvested
81.4
81.4
81.4
82.2
82.7
83.7
Brasil 100-110
Yield
43
46
48.5
43
46
48.5
Argentina 53-58
Production
3,499
3,743
3,947
3,533
3,803
4,059
Paraguay
7-9
Carry -In
370
370
370
370
370
370
Others 6-8
Imports
30
30
30
30
30
30
Under such scenario, the worst case figure (without
considering black-swan type weather events) would
Total Supply
3,899
4,143
4,347
3,933
4,203
4,459
be 166 only 6 MMTs below last years all-time
Crush
1,850
1,870
1,900
1,850
1,870
1,900
record and in-line with this year`s expected production
Exports
1,800
1,850
1,925
1,800
1,850
1,925
of 165-169 MMTs.
S+R
120
125
130
120
125
130
The best-case scenario would bring about production
Total Use
3,770
3,845
3,955
3,770
3,845
3,955
of around 185 MMTs, surpassing last years record by
Ending Stocks
129
298
392
163
358
504
over 12 MMTs!
Even if Chinese demand next year swells to 87-90
Stock/Use Ratio
3.4%
7.8%
9.9%
4.3%
9.3%
12.7%
MMTs, it is important to understand that South
America is here to stay when it comes to soybean
effects of severely reduced yields and increased demand to U.S.
exports and that the U.S. and not Brazil or Argentina will be the
and world soybean balance sheets, it is also prudent to also
holder of stocks for the foreseeable future.
consider the other side of the story and the implications it too
Although estimates of 1900 to 2000 million bushels of soybean
could have on international prices. It is premature at this point to
exports out of the U.S. for 16/17 are possible, they are only likely
assume extreme balance sheet scenarios for the 16/17 U.S. crop
under a scenario of serious stress to the 16/17 South American
year. U.S. stocks below 200 or above 500 million bushels are both
crop. Otherwise, a range of 1700-1900 cannot be ruled out, which
possible for next year, but both should be considered outliers at
in turn give way to the balance sheet scenarios here presented.
the present time, until more is known about the 16/17 U.S. crop.
Bottom line: although it is important to consider the potential

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