Bottleneck At Ports Could Lift Soybean Prices – Teucrium Commodity Trust – Teucrium Soybean Fund (NYSEARCA:SOYB)

On March 25, in an article for Seeking Alpha entitled, What A Ratio And Crush Spread Are Saying About Corn And Soybeans, I examined the relationship between the prices of corn and soybeans at the start of the 2020 planting season in the United States. This update will look a the price relationships since last week and explain why the South American crop could face logistical issues over the coming weeks.

The United States is the world’s leading producer and exporter of soybeans. We are now moving into the 2020 planting season, where farmers will be planting the oilseed that will meet global requirements after the harvest season in the fall.

Meanwhile, Brazil and Argentina together produce more soybeans than the US. In the southern hemisphere, it is now the start of the harvest. Coronavirus knows no borders as the global pandemic continues to infect people all over the world and claim victims. As of the end of last week, hundreds of thousands of people have tested positive for the virus. It had already claimed well over 20,000 lives. The pandemic is impacting every aspect of life, and agricultural products are no exception.

Meanwhile, the numbers are likely far higher than reports. In many parts of the world, testing is not available, and healthcare is not as advance as in the US, Europe, and parts of Asia. When it comes to the production of soybeans in South America, a widespread outbreak of the virus could impact exports creating shortages of the oilseed. The Teucrium Soybean Fund (SOBY) moves higher and lower with the price of the soybean futures market.

Soybeans are going into the planting season below $9 per bushel

In early 2018, before the escalation of the trade war between the US and China, the price of nearby soybean futures on the CBOT division of the CME rose to a high of $10.71 per bushel.

Source: CQG

As the weekly chart highlights, the price of nearby soybean futures reached a low of $7.8050 in May 2019 as the trade war between the US and China escalated. In mid-January 2020, the “phase one” trade deal lifted the price of oilseed futures to over $9.40 per bushel, but the outbreak of Coronavirus in China and its spread around the world sent the price to a higher low of $8.21 in mid-March. Before the trade war began, China imported around one-quarter of the US annual soybean crop. While the “phase one” trade deal opened the door for US exports to the world’s most populous nation, demand destruction in all markets weighed on the price. As we enter into the spring planting season, the uncertainty of the 2020 crop lifted prices.

On the weekly chart, the price recovery caused price momentum and relative strength indicators to turn higher, but both remained below neutral readings at the end of last week. Open interest, the total number of open long and short positions in the futures market declined from 880,900 contracts in early February to 763,991 contracts on March 25, a drop of 13.3%. With the planting season on the horizon, hedging activity typically rises at this time of the year. However, the deflationary spiral in all markets on the back of Coronavirus has made this year anything but typical.

The corn-bean ratio is at a balanced level

One of the metrics that guide farmer’s behavior in the US is the price relationship between corn and soybeans. Many producers have a choice when it comes to the crops they plant, and the relative prices of the grain and the oilseed is a barometer of which agricultural product will yield the best return on their acreage. The long-term average of the corn-bean ratio is around the 2.4:1 level or 2.4 bushels of corn value in each bushel of soybean value. The seeds going into the ground now reflect the prices of November beans and December corn futures, which are the new-crop contracts.

Source: CQG

As the chart illustrates, the new-crop contracts are at just above the long-term average, telling us that farmers are likely to plant equal amounts of corn and soybeans over the coming weeks.

The crush signaled a recovery

The crush spread in soybeans is another tool that provides clues about the demand for soybeans. Processors crush the raw oilseed into soybean oil and soybean meal. When the synthetic crush spread rises, it indicates a growing demand for soybean products; when it falls, it can signal demand destruction. The requirements for bean products translate into the need for soybeans, which are the ingredient in the meal and oil.

Source: CQG

The daily chart of the May soybean crush spread highlights the significant increase from late February through March 24. Even though the crush spread has corrected lower over the most recent trading sessions, it remains well above the late February low.

Source: CQG

The new-crop December crush spread remains at an elevated level, which is a supportive factor for the price of the oilseed futures.

The South American harvest and exports- Brazil and Argentina are critical suppliers- Bottlenecks at ports are possible

One of the issues facing the soybean market when it comes to the path of least resistance of the price is the ability for exports to travel from South American ports.

Source: World Atlas.com

The US may be the top producing nation, but together, Brazil and Argentina produce more of the oilseed. As Coronavirus continued to spread around the globe, Brazil and Argentina are likely to suffer during the global pandemic. As businesses shut down, and people are locked in their homes to avoid transmission of the virus, it could create significant bottlenecks at ports during the harvest season. While the US is planting its 2020 crop, South American soybeans may not travel to consumers around the globe as they have in past years. Agricultural products do not have the same shelf life as other commodities like metals, minerals, or energy products. Therefore, shortages of the crops that feed the world could develop on the back of logistical issues. Scare supplies lead to higher prices.

SOYB is the soybean ETF product

I recently went into my local supermarket to stock up on some supplies. Despite the shortage of toilet paper, my local Albertsons had packs of four rolls for sale at an incredible price of $10. Scarcity caused prices to explode. Almost everyone on the checkout line had the $2.50 per roll product in their baskets. Soybeans were trading below $9 per bushel at the end of last week. In 2012, a shortage drove the price to a high of $17.9475. The potential for scarcity over the coming months comes from both logistical problems at South American ports and from the uncertainty of the weather conditions in the United States, which will determine the 2020 harvest.

The Teucrium Soybean Fund (SOYB) holds a portfolio of actively traded soybean futures contracts. The most recent top holdings include:

Source: Yahoo Finance

SOYB has net assets of $25.18 million, trades an average of 39,791 shares each day, and charges a 1.15% expense ratio. May soybean futures fell from $9.7350 in early January to a low of $8.21 on March 17, a drop of 15.67% before recovering 9.26% at a high of $8.97 on March 25.

Source: CQG

At the same time, the SOYB ETF fell from $15.93 to $13.40 per share or 15.88% and then recovered to $14.20 or 6% higher than the recent low. The weaker performance on the upside was because most of the price gains were in the nearby futures contracts, and SOYB holds a blend position of three contracts.

While all eyes on are on US crop as we move into the spring, the ability to export soybeans from South America could have a significant impact on the price of the oilseed futures over the coming weeks.

The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. I just reworked the report to make it very actionable!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.

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