Spring planting time is rapidly approaching, and grain producers are facing quite a dilemma. Will their products be held hostage in trade negotiations? The U.S. agricultural markets have expanded steadily for the last 10 years culminating in more than $25 billion in exports of soybean and soybean products in 2016. Canada, Mexico and China account for more than 10% of our agricultural exports individually, and more than 40% combined, according to the U.S. Department of Agriculture. Any modification of trade policies that slows the pace of soybean exports would be disastrous following last year’s record harvest.
Steady Chinese growth has supported soybean meal for the last decade. This is why the all-time high in soybean meal was made just last year, rather than in the relatively recent 2012 commodity rally. More interesting is the fact that the soybean oil high still stands from the 2008 agricultural rally. The disconnection between the underlying soybean market and its products helps illustrate how complex soybean crush analysis can be.
Potential global political backlash to the new administration’s trade saber rattling aside, commercial traders on the supply side have taken control of the market by selling more than 60,000 soybean meal contracts through February. This increases their net short position to more than 117K contracts and is within spitting distance of their record net short position of 128K. Their total position of more than 435K has also grown proportionately with their net short position and is also near its historical high of 460K. The net and total positions in the Commitments of Traders reports can be viewed in the same trend-trading context as volume and open interest. Thus, the growing commitment to deliver the physical commodities at these prices is increasingly bearish.
However, as with trend-trading, patience is everything. Therefore, picking a top is not quite that easy. The calendar suggests that the spring planting fears may hold back producer short hedging. Speculators typically lead the spring rally and we expect this to continue. Once acreage and crop distribution appear to be set, the markets start to fall. The decline usually begins with soybean oil followed by soybean meal and finally soybeans. We expect this pattern to hold and that soybean meal will mark the biggest decline in the grain complex over the coming year from whatever the spring planting high turns out to be.
The crude oil market is generating massive amounts of producer short hedging as it approaches long-term overhead resistance and nearly profitable production prices for domestic suppliers. Commercial producers are now short a record 497K contracts on a total position that hasn’t been this large since 2007. The commercial traders seem confident in their ability to cap crude oil prices below the long-term averages now between $54 and $60 per barrel. Given the incoming administration’s pledge to support energy producers, we believe they’ll find plenty of profitability at these levels to not only service debt, but also begin bringing back workers. Watch carefully for short-selling opportunities above $55 per barrel.
Finally, the process of broad market turns like the ones we’re expecting in soy and crude take some time to play out. The value of the COT data lies in its ability to identify tipping points due to an imbalance of positions between the market’s industry participants and its speculators. The larger the imbalance is, the bigger the bubble; the bigger the bubble, the bigger the pop. Wait for the pop.