Soybeans Could Offer Value At The Current Price

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Each year is a new adventure in the agricultural markets. The price of soybeans was trading around the $9.90 per bushel level on Wednesday, January 24.

Soybeans are a multipurpose crop. Agricultural companies like Archer Daniels Midland and Bunge Limited crush soybeans into products. Soybeans meal, a high-protein fiber, is typically a primary ingredient in animal feed. Manufacturers use soybean oil for the production of cooking oils, margarine, salad dressings, mayonnaise, and other consumer products. The United States is the world’s leading producer of the oilseed. Therefore, several factors determine the path of least resistance for the price of beans. First and foremost is always supply and demand. When it comes to supply, it is Mother Nature who ultimately determines the size of crops. Over the past five years, almost picture-perfect growing conditions across the fertile plains of the U.S. resulted in abundant crops which weighed on the price of soybeans. However, over the past two years, we have seen supply scares that caused brief rallies which create opportunities for nimble traders. Source: CQG

As the weekly chart highlights, a palm oil shortage in Asia caused the price of soybeans to explode from $8.49 in early March to highs of $12.085 per bushel in early June of 2016. However, as the weather in the U.S. created a bumper crop, the price declined below the $10 level.  In 2017, a drought in the Dakotas and Montana in late June sent the price of wheat higher and soybeans followed rising from $9.0025 in early June to highs of $10.2775 in early July before another bumper crop sent prices lower. As you can see, soybeans tend to rally during the beginning of the growing season in the United States each year as uncertainty about the crop causes speculative buying.

While the supply side of the fundamental equation for soybeans is a function of the weather, demand has been steadily climbing. Each quarter, the world adds approximately 20 million people to total population. Moreover, the standard of living in China continues to improve. Therefore, each year, more people with more money are competing for food which is a finite resource. The long-term chart displays a bullish trend in the soybean market over the past two decades. Source: CQG

As the quarterly chart shows, soybean prices have been making higher lows since the turn of the century which is a result of increasing global demand. At the same time, a weak dollar tends to support U.S. soybean exports. As we head into the 2018 crop year, the dollar index has declined to the lowest level since 2014 at around 89. A weak dollar and the uncertainty about the 2018 crop year could create opportunities to trade soybeans as farmers will be planting crops in the spring. There is no guaranty that 2018 will turn out to be the sixth straight year of bumper crops. We could be in for lots of price volatility in the soybean market in the months ahead if conditions do not support another year of bumper crops.  

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