Is the U.S. set to run out of soybean inventory, analyst asks

As supplies tighten, volatility increases, analyst says.

It might be said that the world has been flipped upside down over the last year.

The sobering reality of several events has changed the environment of the commodity complex for the foreseeable future, in particular grains and meats: the COVID-19 environment lasting much longer than most anyone thought back in late winter of 2020; trade agreements between the U.S. and China; and less-than-ideal weather conditions globally.

The United States (as well as the world) had fallen into a comfort zone where ample supplies were readily available, and most end users practiced a just-in-time inventory approach to ownership. That model is changing from a just-in-time mind-set to a just-in-case mind-set. Until world inventories are on the rise, expect food security practices to be more dominant. A prime example over the last several months has been the ferocious appetite from China securing a broad spectrum of agricultural supplies. Recently, Russia (the world’s largest exporter of wheat) indicated it would impose a substantial tax on export sales – another sign that food security and building stocks are paramount.

As supplies tighten, volatility increases. Volatility provides opportunity, yet volatility also suggests risk. For producers, the opportunity comes in the form of higher prices. When analyzing the soybean market, one must wonder if the market has yet done its job to ration inventory.

The current stock-to-usage figure (expected leftover supply at the end of the marketing year divided by usage) is near 3%. Historically, this low of a percentage suggests soybean prices above $15. Currently, soybeans are trading under $14 with continued strong weekly export sales.

Projected carryout is currently 140 million bushels, and some are debating it to be near 100 million. Is the U.S. on the verge of running out of inventory? At some point, one may question the U.S. exporting additional inventory when domestic supplies could become critically tight for our nation’s own food security.

The new administration will have to tackle this potential dilemma. Soybeans are but one example of tight supply that could influence farmer marketing decisions for the next several years. It will likely go deeper than just marketing, however, as input costs adjust. Landlords will pay close attention to firming grain prices and seek what they will determine is their fair share.

The bottom line of this Perspective is to realize that change is occurring, and you can either embrace it or fight it.

For those who are producers, it is great to take advantage of higher opportunities and focus on cost of inputs and communications with landowners. The trough of low prices experienced the last several years due to ample inventories is likely behind the market for at least the next year, and possibly two years. This is with the generalized assumption that both the Northern and Southern Hemispheres produce average to above-average crops.

The confluence of just-in-case inventories, declining supplies, and increasing demand have turned bear markets into bull markets practically overnight. If volatility is to remain high, this also implies prices could rapidly descend.

The key for you will be preparation for either sharp gains or fast collapses. Often, markets will trade on perception, not facts. The old saying is that perception becomes reality. There may be merit in understanding this view.

Disciplined preparation will reward those who take the time and effort to manage volatility by focusing on a strategic plan.

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If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-TOP-FARM, extension 300.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

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