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As I was putting tother my Monthly Analysis this past weekend, a number of markets stood out to me. In most cases it was because long-term technical patterns were playing out as expected, a clear example being the 3-month selloff in WTI crude oil being a Wave 2 move within the market’s 5-wave uptrend, as well as a case of a Benjamin Franklin Fish Analogy[i]. There were also a number of markets that seemed to contradict each other, if we put much faith in traditional intermarket technical analysis (e.g. the US dollar, US stock indexes, and crude oil all showing long-term uptrends at the same time[ii]). The market that stood out to me the most, though was the National Soybean Price Index (ZSPAUS.CM), the weighted national average cash price and the intrinsic value of the US soybean market.
Monday night brough the usual debate over how markets would open Tuesday morning, coming out of a 3-day holiday weekend. Did it rain enough in Brazil? What about funds moving to a net-short futures position the last week of December? Doesn’t this look like a bear trap? The bottom line is folks in agriculture are desperately looking for something to be bullish about in soybeans, so much so they see everything through a bullish lens. Even if it is actually bearish. For the record, my weekly and monthly analysis was mixed. While the futures market still looks to be in an intermediate-term uptrend on its standard weekly bar chart (open, high, low, close), if we remove the noise and look at weekly closes only[iii] on the March soybean futures (ZSH24) seasonal study we see a clear downtrend as last week’s close of $12.98 took out the previous low weekly close of $12.9925 from the first week of October.
The NSI shows us something similar looking long-term rather than intermediate-term. The index’s standard monthly bar chart shows the completion of a bullish spike reversal back in October, with the subsequent rally to a November high near $13.38 Wave 1 of the new 5-wave uptrend pattern[iv]. If so, the selloff seen during December to a low near $12.37, before closing the month near $12.42, could be viewed as a Wave 2 break similar to what we see in WTI crude oil (and many other markets). But what if we again remove the noise and focus only on monthly closes only?
This changes things, or if not changing, at least puts the cash soybean market at a crossroads. As you may recall, I use the cash index to show me what a market’s real supply and demand situation is through the use of the Unknown Variable Solution[v]. At the end of December 2023, the NSI priced near $12.42 correlated to an available stocks-to-use (as/u) figure of 7.8%. The previous December (2022) saw the NSI at $14.96 with an as/u of 3.9%. This is clear evidence of how much looser the current supply and demand situation is historically. And as they say in the infomercials, “But wait! There’s more!”
If we set aside the fundamental implications of the NSI as December ended, and focus solely on its technical pattern, we see the cash soybean market continues in a head and shoulder top formation. I first talked about this pattern at the end of April 2023 as the NSI settled near $14.02, below the neckline dating back to the November 2021 settlement of $11.81. The head (high monthly close) was $16.51 from May 2022, creating a range (distance back to the neckline) of $3.88. Subtracting this range from the break of the neckline at the end of April ($14.14) put the downside target near $10.26.
I’ll give soybean market bulls a chance to regain consciousness after that last sentence. There, are you good? Need some more smelling salts? Okay, I’m not saying the NSI WILL fall to $10.26, but technically it COULD. If so, what would be the catalyst? Supply and demand, which according to Newsom’s Market Rule #6 (Fundamentals win in the end.) is exactly as it should be.
- Supply: We already know US as/u were much larger at the end of 2023 than the end of 2022. If we add what could be a still large Brazilian crop to the pile, then global supply isn’t going to be bullish.
- Demand: The US remains in a trade war with China, a Twitter-driven spat that has led to the US becoming a secondary player in the global market. The latest weekly sales and shipments update, for the week ending Thursday, December 22, showed US total sales of 1.335 bb, down 15% from the same week the previous marketing year. Total shipments of 805 mb projected total marketing year export demand of 1.643 bb, down 22% from the previous year’s reported 1.918 bb. Crush demand is not likely to increase enough to offset the continued drop in exports. (The previous marketing year shipments were down 9% from 2021-2022’s reported shipments of 2.101 bb.)
Again, the cash soybean market at a crossroads as 2024 gets under way. If the NSI can first hold above the October monthly close of $12.09, Then it would look like a long-term uptrend is still in place. If the NSI posts a low monthly close below last October, the November 2021 mark of $11.81 comes into play as possible support. And if that doesn’t hold, well, $10.26 looks a lot more likely. Particularly if the November soybean futures contract continues to buy 2024 acres away from corn. Two-thirds of the way through the 6-month pricing window, that is still the case with the spread’s average weekly close sitting at 2.49 as compared to the previous 10-year average weekly close of 2.4[vi].
If cash soybeans take the bearish fork in the road, from a timing point of view the low monthly close could come next fall (September through November 2024). Let’s see how this all plays out.
[i] The Benjamin Franklin Fish Analogy tells us, “Like guests and fish, markets start to stink after three days/weeks/months (whatever time frame is being studied) of moving against the trend.”
[ii] The monthly chart for the US dollar index is the wildcard. I can make the case for both a long-term uptrend and downtrend at the same time. From a fundamental point of view, the greenback looks bearish given all the talk about the FOMC cutting interest rates during 2024.
[iii] A combination of the Goldilocks Principle (Daily charts are too hot. Monthly charts are too cold. But weekly charts are just right.) and the Wilhelmi Element (The only price that matters is the close.)
[iv] It’s always interesting applying technical analysis to the key fundamental of a market’s intrinsic value.
[v] The Unknown Variable Solution: Since we don’t actually know a market’s supply or demand, and I refuse to use USDA’s (or any government agency’s made-up numbers) we can solve for available stocks-to-use (as opposed to the imaginary ending stocks-to-use) any day by using the value of the cash index. This tells us where the supply and demand lines meet, again the intrinsic value of the market.
[vi] The 2023 edition of the spread showed an average weekly close of 2.26. Reportedly (by USDA, so take it for what it’s worth) US producers planted 7.1% more corn acres in 2023 than the previous year and 4.5% fewer soybean acres.
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