When the closing bell rang on Halloween, December corn and January soybeans finished with their third-largest gains for the month of October since 1980, ending up 17.5% in corn and up 13.9% in soybeans.
Had we been away on vacation, we would be excused for being surprised since the year up to October had been one of the most bearish on record with ideal weather conditions and a trifecta of record crops expected for U.S. corn, soybeans and world wheat.
Let’s examine probable causes for the demand…
Was there a major freeze or blight of some sort?
No, in fact harvest is going well, except for some delay in the Eastern Corn Belt, and USDA may increase its crop estimates in the next WASDE report on Nov. 10.
Is there drought in South America?
Yes, but not enough to explain October’s rally. DTN noted hot and dry conditions in central Brazil early in October, which delayed soybean planting for a time, but rains moved in around the 25th of October and more rain is in the forecast. On Oct. 30, USDA’s attache in Brazil reported that this year’s soybean crop estimate remains unchanged at 94 million metric tons and also noted that the delay in soybean plantings may result in a smaller area for second-crop corn.
Was the October rally just a fluke?
After all, we are soon going to have more grain available than we have capacity to store, some 952 million bushels more, said USDA on Oct. 16. Similarly, some are saying that the recent rally is due to transportation snafus and shouldn’t be trusted.
Unfortunately, those arguments are missing the larger, more significant point of what just happened: The bearish anticipation of record harvest that has had a hold on markets and has scared potential buyers away from grains for months has finally been broken. Prices absorbed all that the supply side of the market had to offer and showed surprising resilience. Now it’s time for the demand side of the market to speak up and, judging by October’s big gain, demand has something to say.
For soybeans, demand is coming from many directions, but it starts with soybean meal. As I tried to explain in the Aug. 12 article, “A Long-Term Case For Soybeans,” soybean meal is unique and valuable in its role to help a prospering world acquire more protein. It is no surprise that soybean meal is profitably surviving this year of surplus. The December-to-March 2015 soybean meal spread has shown a bullish inverse for a long time and, on Oct. 16,
Senior Ag Meteorologist Bryce Anderson and I noted in DTN’s Closing Market Video Comments that, among grains, soybean meal was the quickest contract to rebound, as its bullish inverse was increasing, a strong sign of urgent buying among commercials.
Soybean oil prices have been waning for three-and-a-half years and, in September, bean oil reached its lowest price in more than five years. However, even December soybean oil found support in October and finished the month at its highest price in over two months. Vegetable oils, in general, turned higher in October, sparked in part by news that Malaysia was increasing its biodiesel mandate and by new concerns of dry weather in Indonesia and Malaysia, a possible threat to palm oil production. The combination of higher meal and oil prices increases incentives to crush more beans. In the March contracts, crushed soybeans brought $1.75 a bushel more than uncrushed beans on Friday, the highest month-end premium for March contracts since 2008 and strong evidence of domestic demand for soybean’s products.
In addition to increased domestic demand, soybean and meal exports have been on a tear. After only eight weeks in the new 2014-15 season, soybean export sales and shipments already total 1.253 billion bushels or 74% of USDA’s export estimate for the entire season. Similarly, sales and shipments of meal account for 59% of USDA’s estimate. The strong pace of exports is not likely to let up in the next several months as the U.S. remains the world’s primary source for soybeans. As of Friday, Oct. 31, soybean offers at the U.S. gulf were $1.01 a bushel less than those in Paranagua, Brazil.
One of the best technical tools for identifying long-term market turns is the stochastic indicator applied to a monthly chart. This momentum indicator was developed by George Lane and his associates back in the 1950s and has stood the test of time.
If you have the opportunity to look at any monthly grain chart with the stochastics indicator, you will soon notice how good the indicator is at identifying major lows, especially when those prices coincide with fundamentally cheap levels. On a monthly chart of January soybeans, October’s reversal of prices turned the stochastics indicator clearly bullish from an oversold level, the best chance for a turnaround since the indicator turned bearish two years ago.
The monthly stochastic was also one of the main reasons that DTN’s Senior Analyst Darin Newsom wrote in his Friday column, “Corn has established a major (long-term) uptrend.” For many still focused on the size of this year’s harvests, that statement may be hard to understand, but the market’s dynamic has changed. Like Humpty Dumpty, the bearish case for grain prices has had a great fall, and it’s going to take more than the king’s horses to drag prices that low again.
Prices may turn choppy in November while USDA updates harvest estimates, but if history is any guide, soybeans should hold above their lows of early-October.