Soybean market breadth has been strong on the CME – even unprecedented. Speculation behind the move has come from many different fundamental angles relieving U.S. farmers whether it be: 1) Brazilian farmers curbing forward-selling with political uncertainty; 2) Argentina unloading of record soybean stockpiles now being offset by unfavorable weather; 3) China shifting purchases from Argentina to the U.S.; 4) Macro - A weaker Dollar making U.S. crops more competitive in the global landscape.
Whatever the correct story, the market has seen huge relative volumes and record levels of futures open interest behind the price move (some of it a structural change with ETFs holding futures contracts) off the end of February Lows with a huge long build in net futures and options positioning (table below), which we outlined in Monday’s call-outs. Implied vol. has spike triple digits (3-4x trailing averages in grains). See charts below for the behavioral set-up.
However, with regard to Y/Y farmer economics and FX moves (especially in the Real and Argentine Peso), we would need to see a sustained continuation in the short-term move before we would reconsider farmers’ beaten down propensity to consume crop input expenditures (fertilizer, seed, nutrients) in a time of credit contraction on the farm – farming realities move much slower than the CME, hence our thesis - the price of inputs has been slow to lag real-time grains prices out of the 2012 bubble highs, compressing farmer margins to dire straits. AGU’s retail exposure is more levered to the price of domestic corn, which like soybeans, is only up mid-single digits Y/Y against a U.S. dollar that is down -3.8% Y/Y. Continued unfavorable economics should weigh on the budgets of cash-strapped farmers who have gotten little relief in the price of seed, fertilizer, nutrients since the 2012 bubble highs in grains prices – YET – See last chart below.
