October 24, 2016

25/10/2016: Commodities market outlook – the other side of the story

By Pedro H Dejneka, AGR Brasil, AgResource

With vast speculation taking over the commodities sector since early March giving way to historical vertical-like price moves, there has been a “race” to try and matchup “fundamental reasons to justify” the rally.


The other side of the story
 
Dr Perdro H Dejneka

“In all intellectual debates, both sides tend to be correct in what they affirm, and wrong in what they deny.”
-John Stuart Mill

As “enlightened” as such statement by what Stanford University calls “the most influential English speaking philosopher of the 19th century” is, one could easily make an argument that when it comes to commodity market analysis the statement seems to be as useful as a bicycle to a fish.

In the world of commodity analysis, there seems to be a constant attempt to “prove the unprovable” on the part of the trade. With vast speculation taking over the commodities sector since early March giving way to historical vertical-like price moves, there has been a “race” to try and matchup “fundamental reasons to justify” the rally.

It seems as though even the best and brightest get caught in this game of cat and mouse. Significant changes to South American soybean crop totals as well as intense early year demand by the Chinese and now, more than ever, speculation over the potential for drought-like weather conditions for the US crop, have indeed provided some much-needed fuel to the soybean market in Chicago.

These conditions have given way to heavy speculation about US and South American balance sheets, which has been exacerbated by the lack of significant data-points between late March and early July, creating a true “free-for-all” in balance sheet estimates.

The dominant feature of this past month in many “insider” comments and analysis has been the extrapolation of Chinese demand pace and of cuts to South American production with 15/16 and 16/17 US soybean balance sheets.

Two things are very interesting to note:

1: The trade seems ready to simply assume that US yields will be, at best, trend. Many analyses we have come across recently show yield scenarios going only down from 46-46.5 bpa. Such is the power of the El Niño to La Niña effect in people’s psyches. Yes, the weather has been drier than normal and hotter to much hotter than normal in parts of the US Midwest, however, it is indeed only June – and crop conditions in soybeans are at the highest level ever for this time of the year.

2: The use of constant demand figures under different yield and total production scenarios. This one is astounding as it completely throws out the basics of supply x demand law, assuming demand for US soybeans as completely inelastic.


Read the full article HERE.
 

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