March of the Penguins (Soybeans)

As I sit down to write this piece, North America had just passed the winter solstice, the shortest day of the year and a reminder that spring planting (and spring training for any fellow baseball fans out there) is that much closer. Of course, our friends south of the equator experienced the annual summer solstice, the longest day of the year, with the 2025 South American soybean crops growing larger on the horizon, both figuratively and literally. As we turn the calendar page to January 2025, knowing the challenges the next few years are expected to bring, initial attention will turn to the United States Department of Agriculture's (USDA’s) January round of reports.

In case you are new to the industry, the first data dump of the year (this time around on Friday, Jan. 10, for those who want to mark it on their calendar) includes the annual crop production guess, grain stocks as of Dec. 1 (Yes, you read that correctly, Dec. 1) and winter wheat/canola seedings, just to name a few. What do I think of it? I’ve long said the hype surrounding this annual silliness is the equivalent of what we have to put up with for the Super Bowl, Daytona 500 and Kentucky Derby all rolled into one. The last number of years I’ve used a famous quote from Ralph Waldo Emerson to describe my thoughts on all those who view these reports as fundamental gospel in the grains industry, despite all the evidence I’ve shown over the decades to the contrary, “A foolish consistency is the hobgoblin of little minds.”

The reality is that the market shows us both real fundamentals and investor sentiment every day. If we apply what we learned in Economics 101, the Law of Supply and Demand tells us market price is the intersection of the supply and demand lines.

Since we don’t actually know what the supply and demand numbers are, despite market “economists” telling us USDA’s estimates (guesses) are not imaginary, the only part of the equation we know is market price. Therefore, by studying the trend (price direction over time) of any market, we can observe how immediate supply and demand is changing (using national cash indexes and spot futures contracts), as well as changes in expected supply and demand (deferred futures contracts) and longer-term fundamentals (futures spreads and forward curves). It’s not complicated; it never has been complicated. But yet ...

Anyway, I’ve talked in this space before about how we can compare what a market is doing now to what its normal seasonal tendencies are. Recall these seasonal tendencies generally reflect the usual flow of supply and demand over the course of a year. When we see a contraseasonal move, it tells us something has changed with the fundamental picture. As we look at the attached seasonal study for the March soybean futures contract, we see there has obviously been a dramatic change in expected supply and demand.

Why focus on the March issue? As we move through the rest of the North American winter quarter/South American summer quarter, March will be the lead contract closest tied to global cash markets. The March issue will give us a good read on what is expected from Brazil’s next crop before harvest gets rolling in late February.

A look at the seasonal study shows an early divergence between the five-year index (red line) and 10-year index (blue line). The longer-term pattern is for the March contract to post an initial selloff from the first weekly close of June through the last week of September, losing an average of 6% (based on weekly closes only). Think of this as a reflection of the U.S. crop maturing. However, from the last weekly close of September through the end of February, the 10-year index shows an average gain of 8%, with most of the rally occurring through the end of December.

 The March 2025 (green line) contract posted a high weekly close the fourth week of May at $12.2625, and if we apply the analytical “horseshoe proximity,” we know close is close enough. By the second weekly close of August, March 25 had fallen to a low weekly close of $9.92, a drop of 19% as the 2024 U.S. crop got larger and available stocks swelled in relation to demand. We know this because the National Soybean Index (national average cash price) dropped to near $9.18 during August 2024, its lowest price (at the time) in four years. Again, if we know market price is the intersection of the supply and demand lines, we know supplies were increasing versus demand.

The market didn’t stop there though, with the index falling to a new low of $9.0050 during December (as of this writing) and March hitting a low weekly close of $9.7925 (Friday, Dec. 20). This pushed the drop by the futures contract to 20% with South American harvest still to come. The market is telling us supply and demand is expected to continue to grow more bearish, and long-term investment traders are paying attention. Through mid-December, this group had increased their net-short futures position to 109,300 contracts, a number that sounds impressive until we factor in this same group held a record-large net-short futures position of 197,300 contracts in early March 2024. This tells us there is plenty of room for them to continue selling, particularly given the political climate in early 2025 with the promise of more broken trade agreements, increased tariffs on key trade partners and the fire under existing trade wars cranked up again.

As I look at the 2025 futures contract in relation to its normal seasonal pattern, the first thing that came to my mind was the 2005 documentary (has it already been 20 years?) — March of the Penguins. Here, the 2025 penguin (soybean futures contract) is on a slippery slope headed toward the gaping maw and flashing jaws of a leopard seal.