Soybeans Are Extremely Oversold – Teucrium Commodity Trust – Teucrium Soybean Fund (NYSEARCA:SOYB)

Instrument

The Teucrium Soybean Fund (SOYB) provides investors unleveraged direct exposure to soybeans without the need for a futures account. Therefore, the decision to invest in this fund should be made after analyzing the soybean market.

Seasonality

The current soybean futures price is well below the three-year low:

Considering the five-year range, the price corresponds to the minimum value:

So, from this point of view, everything is clear – the market is oversold.

Supply and Demand

The latest USDA forecast, published on January 10, did not make critical changes in the supply and demand structure of the soybean market. According to the USDA, the estimated global soybean ending stocks in 19/20 will amount to 96.67 million tons (+0.27 million tons). But most importantly, a deficit of 12.41 million tons is still expected in the soybean market in the current marketing year:

The U.S.-China trade deal

It’s interesting to note that the soybean futures price fell the day the phase one was signed. In my opinion, this is irrational, because the deal requires China to a $19.5 billion increase in agricultural trade from 2017 to 2021:

Source: USTR

And judging by the long-term dynamics, this is a very significant increase:

Source: The Peterson Institute for International Economics

And also do not forget that, soybeans are one of the main agricultural products the US sells to China:

I understand that the market is waiting for real contracts for the purchase of soybeans with delivery to China. And the current situation with the epidemic in China may slow down this process. But now, at least, American farmers have something to hope for. And this situation clearly does not imply soybean prices at a multi-year low.

Fundamental price

In the long run, in the soybean market (like any other commodity market), the price is formed on the basis of the balance between supply and demand. One of the markers of this balance is the stock-to-use ratio. Therefore, there is an inverse relationship between the price of soybean and the stock-to-use ratio, which allows us to determine a fundamentally balanced price level on the market.

According to the latest USDA forecast, the stock-to-use ratio for the global soybean market will reach 27.6% in the 2019/2020 marketing year. And from this point of view, the current price of soybean futures is clearly undervalued:

The same conclusion holds true for the U.S. soybean market:

Bottom line

I think emotions are driving the soybean market right now. And at such moments, it is extremely difficult to predict. But despite this, I believe that the Soybean ETF is oversold and is prone to rise in the coming months.

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.

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