The ongoing trade spat with China has soybean prices in a coma. They have dangled tempting “bait” for a deal with a promise to buy 5 million tons of U.S. beans if resolution on trade can be reached. What would that be worth? My WASDE Wizard® model says just under $2 per bushel.
With final crop estimates for 2018 now released, I’ve been able to do the annual update of my WASDE Wizard ® forecasting model by entering monthly WASDE data for the 2018 season from May through January and deleting older data to keep the “rolling averages” of key model drivers at a fixed number of years. Unsurprisingly, the unprecedented situation for 2018-19, where soybean use is projected 205 million bu. lower than the prior year, despite a supply that’s 267 million bu. higher than the prior year, plays havoc with any models that make forecasts tied to past WASDE history.
Here’s why: Normally, any rise in supply in any given year is somewhat offset by rising usage due to the lower prices that stem from bigger crops. Similarly, in a poor crop year, any major drop in supply is somewhat tempered by reduced usage due the higher prices that stem from falling production.
This year makes mincemeat of models tied to unfettered laws of supply/demand economics. They need to be “tweaked” to let hard-wired changes to demand drive the price forecast instead of letting supply and price drive the demand. Finally, however, I was able to tweak the calculation sequences until the “Wizard” model finally began to churn out credible forecasts for the 2019-20 price outlook for beans under different assumptions on acreage under three different weather scenarios.
The bottom line, key take-aways from the model now updated with 2018-19 WASDE changes from May though January run like this:
USDA slashed soybean exports by 250 million bushels in the July WASDE, lopping 75 cents per bushel off the average farm price, to $9.25 from $10 in the June WASDE.
The huge 2018 crop compounded the impact on ending stocks and price, with the January WASDE now showing the average farm price will range from $8.10 to $9.10; midpoint $8.60.
Should a trade-talk breakthrough occur, allowing the Chinese to follow through on recent offers to buy up to 5 million tons (182 million bu.) of U.S. beans, the model shows that would slash ending stocks from an 82-day supply to a 61-day supply.
Should that drop take place between now and harvest, the Wizard model projects an average farm price just under $2 per bu. higher than currently forecast.
Without a trade breakthrough, even assuming a cut in acreage and a sub-trend yield in 2019, soybean prices will improve only modestly due to the enormous overhang of ending stocks approaching near double prior record stocks.
For more information on how my forecasting model can generate price forecasts using your assumptions for 2019 acreage and yield for corn, soybeans or wheat under different weather scenarios, please contact me at:
Dan Manternach, President Perfect Fit Presentations, LLC