Friday, June 17, 2011

Why soybean price could double from this level.

Why soybean price could double from this level.
While for the past 12 months, corn and wheat prices have nearly doubled with corn price rising 88% by percent and wheat price by 95%, soybean price has been lagging the performance. However several key factors suggest that risk of soybean price is still dramatically skewed upwards.

Societe General’s Dylan Grice made a neat comparison in the 1970s and what will happen to grain in the future. In 1972, Soviets secretly bought grain on the global markets to make up for a shortfall. That led to the“Great Grain Robbery” of 1972. In 1972, Russia’s wheat crop failed. Russia had to dip into the global grain markets to meet demand. Russia’s purchases sent grain prices soaring around the world.

China now faces similar scenarios. With government artificially suppressing edible oil prices by pouring reserves, farmers are expected to plant 20% fewer soybean acres this year. China's overall soybean area, on a harvested basis, was pegged at 8.5m hectares, 200,000 hectares lower than the current USDA estimate and the lowest since 1999. With soybean/corn ratio as unprecedented low level, more farmers tend to switch soybean to higher value crops.

Not only the tight supply balance resembles 1972, technical parallel is equally compelling as well. I overlaid the current 2011 soybean contracts on 1972 and get these.

I remember how Paul Tudor Jones predicted the 1987 crash by looking at a 1920s chart (the famous document ‘trader’). If one believes markets self-resemble, these two charts may give us a clue what’s going to happen. And from a supply and demand side perspective, this makes sense as well. Both the government of China and 1972 Soviet Union interfere with the market, trying to temporarily suppress the grain prices. For a while, they succeeded, led to near-term market prices trending downwards, but later backfire is also expected. Grain prices tend to suffer seasonal weakness in summer, however, with the decades low stock-to-use ratio, any type of supply disruption could trigger the dramatically upward.

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