Reading the Signs: Volatile Markets Offer Market Opportunities

The 2016 soybean harvest was one for the record books. According to the USDA, the nation’s soybean farmers produced an estimated 4.2 billion bushels of soybeans, making it the largest crop ever.

A harvest of that magnitude means there are plenty of soybeans available to the market.

“We have a record crop supply offset by record crop demand,” says Al Kluis of Kluis Commodities. “It’s the first time we’ve grown a 4-billion-bushel crop, and it’s the first time we’ll consume a 4-billion-bushel crop.”

With such a large domestic crop and already low prices, farmers will be on the lookout for market signals indicating there might be opportunities ahead.

Lisa Elliott, South Dakota State University assistant professor and commodity marketing specialist, says market participants will watch for indicators like final U.S. production figures and demand factors such as U.S. export pace and domestic usage. They will also monitor any deviations from the market’s expectations for USDA projected ending stocks.

Key Factors

A key factor likely to impact South Dakota soybean markets lies nearly 5,000 miles south. Kluis says attention turns to the yield potential for South America’s soybean crop in early winter. Some South American soybean harvests begin as early as late January, though the bulk happen in March and April. A weather scare leading up to that harvest window could offer South Dakota farmers a market rally and an opportunity to sell.

“The U.S. produced a 4-billion-bushel crop, but the seven major soybean producing countries in South America are expected to raise a 6.2-billion-bushel crop,” Kluis says. “What happens in the weather down there from January through March has more impact on prices globally than what happens in the U.S.”

Kluis says there is heavy commodity fund participation in the soybean market, which leads to increased volatility. He says, in those circumstances, it’s important for farmers to have a plan and price targets locked in because opportunities can happen at any time.

“Know the markets are going to be volatile and use the available tools to take advantage,” Kluis adds.

Elliott says an indicator farmers can monitor is whether there is a positive carry, meaning the nearby futures contract price is lower than the price will be with a later delivery date, or an inverse in the market, where the nearby price is higher than a futures contract price will be with a later delivery date.

Analyzing Market Spreads

“With a positive carry, the market indicates that it values grain more at a future time period, while an inverse in the market signals that the market more highly values grain at the present time,” Elliott says. “Producers should analyze market spreads to determine when to lock in carry in the market to provide a positive net return to their interest, insurance and storage costs when delaying delivery.”

Elliott says producers need to know their production costs, cash flow needs, expected price outlook, basis projections, insurance coverage and risk tolerance to set goals for potential returns. She says this process should include developing price targets and target date goals. Average price and moving average price projections can be utilized to look for opportunities when prices are above average with respect to fundamental projection estimates. Both fundamental and technical signals can be used to develop triggers in a producer’s marketing plan.

To read more from the latest issue of the South Dakota Soybean Leader, click here.