Large soy carryout may signal correction

Market fundamentals suggest today’s soybean prices are overvalued and are in line for a sharp downturn, says an analyst.

“We are holding a very high price compared to where things could be,” said Rich Nelson, chief strategist with Allendale Inc.

Nearby futures were at US$12.48 per bushel as of Nov. 26.

That seems inflated, given that the U.S. Department of Agriculture is forecasting 340 million bushels of U.S. soybean carryout in 2021-22, which works out to a price of about $11.

Allendale thinks carryout will be 50 million bu. higher than the USDA’s forecast, while other analysts believe it could be 100 to 150 million bu. more.

Nelson doesn’t want to publicize what kind of price that would equate to.

He doesn’t think the market is necessarily discounting the USDA’s carryout forecast, but that is too distant an event for it to focus on.

Right now the soybean market is being buoyed by high energy prices and a shortage of lysine, which has bolstered demand for soybean meal.

Nelson thinks the market may be in for a correction in late December if weather conditions remain favourable through South America’s reproduction phase of crop development.

The main reason analysts are forecasting a bloated U.S. carryout is that early-season sales to China are way down.

China has purchased 19.7 million tonnes of U.S. soybeans as of Nov. 26, which is 32 percent below the same time last year.

Nelson believes the U.S. has a little more than a month remaining to ship to China before Brazil takes over as the main supplier.

U.S. soybeans will be about $15 per tonne cheaper than Brazilian product in December but that flip-flops to a $17 advantage for Brazil in January.

Allendale expects the U.S. will end up shipping 27 to 32 million tonnes to China, well below last year’s total of 35.8 million tonnes.

Demand is down in China due to electrical outages disrupting crush, overcrowding at Chinese ports and soaring ocean freight rates.

A new report shows China’s sow herd is actually 6.6 percent higher than it was at this time last year.

“They over-expanded and they are already taking some measures now to reduce the sow herd,” said Nelson.

He expects that will lead to a further cooling of demand in the March through May 2022 timeframe.

One thing that could spark the market is if China lives up to its Phase One commitments.

As it stands, China is at 76 percent of where it should be when it comes to agricultural purchases in the two-year trade pact.

It has bought $52.5 billion of U.S. agricultural goods from January 2020 through October 2021, according to the Peterson Institute for International Economics. The target for that time period is $68.9 billion.

If China suddenly ramps up purchases and meets its commitments by the end of 2021, that would be a game changer.

“That would be a massive surprise for us and certainly would change a lot of numbers on the soybean balance sheet,” said Nelson.