Who Will Win ... Supply or Demand? the Long Term Picture Appears Clear: Economic Conditions Have Set the Landscape for Continued Commodities Growth. but What about This Growing Season? Will Strong Supply in Soybeans, Corn and Wheat Keep Prices Low? or, Will Beans, with Strong Demand and Asian Rust Potential, Create Volatility and Higher Prices?
Bauch, Carla M., Modern Trader
Supply has been on the minds of traders for months now, and the numbers are consistently large. The United States Department of Agriculture's (USDA) April 8 report predicts 2.215 billion ending stocks for corn, 541 million ending stocks for domestic wheat and 375 million bushels of ending stocks for soybeans--although some believe this soybean number is overestimated and may be closer to 350 million, regardless the figure represents a surplus. Fundamentally speaking, large ending stocks and strong supplies spell bearish forecasts. In some cases, though, other factors, be it weather, potential for crop disease or strong demand may win out and keep prices at higher levels.
While down approximately 36% from a year ago, soybean prices at the end of April were up about 28% from a 31-month low on Feb. 4. Dan Zwicker, operations manager and market analyst with Agrivisor Services Inc. in Bloomington, Ill. doesn't necessary believe this year's large soybean surplus will cause major bearish prices. He says farmers and traders are on guard for rust. "There is a chance that the Midwest may develop rust problems. The market will be [on] edge about this throughout the growing season," Zwicker says.
He adds, "Soybeans are in a position to move over the $7.00 area as the market worries about U.S. production as a result of potential disease, weather and insect problems. While it may be wild from a technical perspective, you could see soybeans at the $7.00 to $7.50 range. It is attainable."
William C. Fordham, owner and proprietor of C & S Grain Market Consulting, who specializes in December corn and November soybean futures, also points to Asian rust and aphids as potential culprits in higher bean prices this year.
"The big unknown is the rust factor," Fordham says. "The rust factor could create more volatility than you would normally see especially with inventories falling." Fordham explains the United States will ship more soybeans than the government is predicting, and as a result of good sales the market will be able to draw down U.S. stocks gradually.
Fordham looks at the average annual trading range as part of his forecasting procedures. He explains November soybean's average annual range for the last five years is $2.05. Since 1970, the average annual range was around $2.20. After looking at historical charts and taking an average range of $2.00, Fordham predicts that beans most likely will see a price above $7.00 per bu. sometime this year, adding that $7.25 to $7.75 is a reasonable target if production problems develop.
Tim Hannagan, market analyst with Alaron Trading Corp., is another analyst with a bit more of a bullish take. He explains many of the traders and analysts that have bearish outlooks are focusing mainly on the supply tables and carryover numbers.
"Some come from a school of thought that is all about supply, but you have to weight both factors. Back in 1996 when corn and wheat were making historical highs and beans were at $8.00 it wasn't supply driving the market ... it was demand," Hannagan says.
Demand drives the market, explains Hannagan. "There are only small times throughout the year when it doesn't. Over a year we only harvest crops for 30 days, the other 11 months we are selling," he says. Hannagan says based on worldwide demand, soybeans should stay above $6.00. He points to China's mandate to boost the amount of protein in its citizens' diet as a major role in this increased demand. "Science has told us that protein is the building block of life and this is not going to change regardless of any economic situation," Hannagan says.
As for the upside, he predicts soybeans could trade from $6.80 to as high as $8.20, depending on weather variables.
However, traders who put more emphasis on a strong supply situation when making forecasts, predict prices mostly in the $5.00 area.
"Around mid-March we had a breakout in soybeans and since then prices have been leaking down. …