Every year for the last four, 2013-2016, WAOB has underestimated the world soybean demand by an average 11 mmt or 10%. Why is it so hard to get the demand side right? All that is needed is to guess China, right? Well, that’s the problem. Much of the growth is outside of China, Europe, and the US. Over 40% of the growth in meal usage in the last 10 years has come from places like Vietnam, Bangladesh, India, and Mexico – see chart above. This is not good news for meat exporting countries like Brazil, the EU, and the US. Tracking all those pieces is a difficult task. The other factor making the guess difficult is estimating supply. Available supplies have grown at higher than trend rates the last three years. There seems to be an unquenchable thirst for soybeans. “Grow them and they will get eaten”. As a side note, WAOB has already raised the 17/18 usage after only three months of estimates.
Here’s a simple solution: first, assume we will produce more because we usually do; second, take the first estimate and add 10%, or use an average demand growth of the prior years. The average demand growth for the last four years is 26mmt. The WAOB estimate for 17/18 has demand growing 18mmt. Look for more upward revisions and lower ending stocks.
The graphic above illustrates another strong ending for the US summer soybean shipping season. (say that fast 5 times) If you have read any of my soybean analyses, you know I don’t believe the US soybean balance sheet is a good indicator of market value. The graph above is a good lead-in to the real story below.
While weather has been the major market factor and will continue to be for at least the next 2 to 4 weeks, by Sep 1 we will start to focus on demand.
WAOB (USDA) has underestimated world soybean imports by an average of 10% (11 mmt) for the last four years. This includes 16/17 as a partial year. Why have they missed it? That’s one of the next stories. One would expect most of the increase or estimate miss to be attributed to China – not true. The increase for China accounts for 36% of the change. The majority of the increase is coming from South Korea, Japan, Mexico, along with many others. To be clear, increase means the amount of change in the WAOB estimate from the beginning of the crop year to the end. The USDA miss may not be a major factor this year when there have been record crops in both North and South America. It could be a major factor for the 17/18 crop. It appears the world soy production for 17/18 will come in below last year by 5 mmt. If imports are underestimated by 10%, or 15 mmt, world carry out goes to 77 mmt vs. the current estimate of 93 mmt. 2015 carry out was 77 mmt, leaving very little margin for error. At the very least, the growing world demand will continue the acreage shift to soybeans, away from grains. My advice: don’t get too bearish on grains and oilseeds.
The volatility in agricultural commodities has disappeared – kind of. Ag commodities are back in their “happy place” of abundance and oversupply, waiting for a weather event. One might expect that the spec funds, aka Managed Money (MM), have left for greener ($) pastures. This is not the case. The data shows they never left. They have however, changed the way they bet.
The change over the last five years has been their propensity to bet on the short side. Take a look at the data – graphs below – the growth in the short side bet is obvious. The graphs show the combined open interest for managed money long and short. The first graph totals all open interest for CME corn, soybeans, soy meal, soy oil, wheat, and KC wheat.
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