Soybeans Futures Search for a Reason to Bounce

Note: Green bars indicate Trump administration announcements on trade

Source: CNBC.com

But after a dramatic price collapse, bargain hunters came into the market and began buying soybean futures and pushing prices back up.  Last week, July soybean settled at 896.5, up more than 6% from the previous Tuesday when soybeans hit a nine year low in price.  Although the bounce appears to be only technical in nature, part of the buying could be related to the better valuation for US soybeans now that Brazilian soybean prices have jumped.

Brazil is not only the world’s biggest producer of soybeans, it also grows the highest quality soybeans in terms of protein content.  This is not only due to its more favorable growing conditions, but also due to a conscious decision by US farmers to sacrifice quality over higher yielding crops.  That makes Brazilian soybeans very expensive in relative valuation.  The valuation gap increased because of heavy buying from China, as the Chinese switched away from US imports to Brazilian in anticipation of US trade tensions.

But unlike industrial commodities, soybeans have relatively inelastic demand, since it is a food item.  The Chinese will still have to feed their people and their flocks of animals, so they will still source it from other destinations, like Brazil.  But as the Brazilian share of exports to China increases, the share of exports to other destinations will fall, especially if prices are spiking due to a premium paid by the Chinese.  That means US producers have new customers in other parts of the world, like the EU. Over the past five years, Chinese imports averaged 55% to 60% of US sales, but almost half go elsewhere.  When tariffs were announced in April, the US Department of Agriculture reported that 485,000 tons of US soybeans were exported to undisclosed locations but were rumored to be in the Netherlands and Germany.

Clearly, US soybean prices will need a lot of good news flow to recover this year. Both speculators and hedgers will be watching the headlines, as well as the charts.  In the daily chart below, soybean futures hit a low of 841.5 on June 19th, rebounded 6.5%, and settled at 885.75 on Wednesday.  It’s possible that the sellers are just pausing to take some profits after a steep drop from 1049.5 on May 29th (a decline of 19.8% in less than a month).  There were also no significant news headlines at the end of last week, so the only reason for the bounce may be technical.  Price found support at a trendline (in red) which is more significant on a longer term chart.

In the weekly chart below, the trendline where soybean futures found support is part of an expanding triangle pattern (in red), which began between 943 and 1001 back in August of 2016.

In June of 2017, price touched the lower trendline and began to rally, targeting the top of the pattern this year.  But the upward re-tracement’s trend was interrupted when price stalled at the consolidation in the middle of the triangle and reversed back towards the bottom of the pattern.  Despite the short term bounce last week, price will have to show stronger price action and regain at least the triangle apex before any further rally can be attempted.