In the past month, prices for CME soybean futures have weakened considerably. Having stood at 1519.25¢ per bushel on April 18th, front-month contract prices closed at 1322.50¢/bsh on May 23rd, shedding almost two dollars in the intervening weeks. This is also considerably lower than during May 2022, when prices broke up through the 1700¢/bsh mark. It is worth noting, as can be seen in the graph below, that prices are still significantly higher than the 2018-2020 period, but given the rate at which prices have fallen recently, it is worth looking at some of the key reasons behind this.
Supply Surplus Looming
From late 2020 to the present, soybean prices have traded at elevated levels when compared to the previous 5 years, and much of this has owed to issues in the supply of the oilseed. The upwards price pressure that Russia’s invasion of Ukraine exerted across the grains and oilseeds markets has been a significant contributor to these high prices, as have weaker crop yields due to droughts in the US and South America, with the latter region being particularly affected by several consecutive years of the ‘La Niña’ phenomenon.
At present, however, the outlook for crop supply appears to have bounced back. In Argentina, where the previous planting season was plagued by one of the country’s worst recorded droughts, improved weather conditions mean that a normal crop is expected again. As the third largest producing nation of soybeans, the recovery from drought-stricken under-production to a standard yield is good news for global supply.
More significant is the latest report from the USDA, which predicts that both Brazil and the US, the two largest producers of soybeans, are set for record harvests. According to the May report, Brazil’s 2023/24 production is set to grow by more than 5% and surpass the record set by the 2022/23 season. Meanwhile in the United States, similar levels of growth are expected due to both a higher yield and “marginally higher planted area.” Given the heights at which soybean prices have been trading in the last two years, it is unsurprising that farmers across the major growing regions have expanded their production to capitalise on the opportunity for high returns. It is a great example of the old adage that ‘the cure for high prices is high prices’, with the record supply forecast likely to suppress the soybean market.
Short Positions Building
Another factor to watch closely is the rate at which speculators have been building short positions on soybeans. As the graph below shows, the net long of Non-Commercial Positions on CME soybeans has contracted from over 135,000 contracts on April 18th to fewer than 22,000 by May 16th. As Karen Braun noted in her column for Reuters, if this trajectory of speculative selling continues it could result in a net short position for money managers for the first time since April 2020. The rate of contract selling for soybeans is connected and driven by the positive supply reports, but it is also important to consider in its own right as an important force for moving prices lower. Whether the outlook for managed money reverts to bullish in the coming months will undoubtedly depend on weather and crop progress reports from the key growing regions, and subsequently any updates to the plentiful outlook of the USDA.
