August was a rough month. I have been bearish the soybean market, and soybeans rallied about 15%. The rally was one of the most pronounced for this time of year in recent history, and I did not anticipate it. This was primarily a fundamental miss on my part.
Our models were not bullish, but they were never overly bearish. That kept our overall positioning smaller and helped to limit the losses.
I continue to use options to define risk. When a market moves sharply against a fundamental view, there are essentially three choices — add to the position, reduce or get out, or hold it. I chose to hold, but I did not add. Given our existing option structure and defined downside, I believed that was the appropriate decision.
In August, we took the loss while our risk structure defined that loss.
What I Missed
August and September are normally bearish months for corn and soybeans. There are obvious exceptions, particularly when late-summer weather threatens US production.
That wasn't the story this year. August weather was actually wetter than normal across much of the corn and soybean-growing region.
Instead, several factors came together at the same time.
The Pro Farmer Crop Tour implied corn yields below trend and lower soybean pod counts. Despite August being the most important month for soybean development, soybeans became a follower of corn.
At the same time, several outside factors added fuel to the rally. The war in Ukraine has slowed exports and created concern that the US may eventually fill some of that void. Conflict in the Middle East has contributed to higher diesel prices and increased production costs in Brazil.
Finally, the broader macro environment has attracted additional money to commodities. Concerns surrounding US fiscal policy, inflation and a weaker dollar have helped create a relatively simple investment narrative: own commodities.
Whatever I think about the longer-term durability of that trade, for now it continues to produce daily buying.
Where Things Stand Now
Despite the August loss and the strength of the rally, my fundamental view has not changed much.
The market's view of the corn and soybean balance sheets has changed considerably more than the balance sheets have.
Funds are now approaching record length across ag commodities, just as the US moves into harvest. Early yield results have generally been strong.
The bullish case is easy to construct. Assume sharply lower US yields, substantially larger US exports because of China and reduced Ukrainian competition, and suddenly both corn and soybean balance sheets tighten considerably.
That scenario is possible. At this point in the crop year, it is also difficult to definitively disprove.
But I don't believe it is the most likely outcome.
China is buying more US soybeans, and world soybean demand continues to grow. But South American soybean stocks remain above year-ago levels, meaning they will ship more to the rest of the world from September through December. My US soybean export projection is slightly above USDA but nowhere near the more bullish projections.
Corn exports are slowing, and I believe USDA's export projection could be 3–400 million bushels too high. However, uncertainty surrounding both US yield and Ukrainian exports makes the corn balance sheet more difficult to define.
What I'm Watching
There are some interesting things going on behind the scenes.
Spreads have weakened and volatility has declined even as outright futures prices have continued higher. Chinese crush margins are deteriorating and China's overall imports have slowed. South American basis levels are falling faster than US basis levels as futures rally.
At current prices, South American September-through-December soybean exports could exceed even my relatively aggressive projections.
The inverse between US and South American new crop continues to widen. The market is encouraging the world to reduce stocks now through December ahead of the South American new crop, which will become readily available early next year.
Higher prices are beginning to ration US demand. Not necessarily by destroying global demand, but by shifting that demand through time and geography, away from the US and toward South America.
Going Forward
The purpose of our risk structure is to make sure being wrong about a market does not become catastrophic to the portfolio. Our use of options, the relatively modest positioning indicated by our models, and the decision not to add as the market moved against us accomplished that in August.
For soybeans, my current view remains straightforward: I believe current prices will ultimately prove unsustainable unless the US soybean yield falls below 51.5 bushels per acre.
Corn is more complicated. US yield and the Ukraine export situation need better definition, and that will only happen slowly over time.
Key Takeaway: Our risk structure — options-defined downside, model-scaled positioning, and the discipline not to add into a move we didn't anticipate — did its job in August: we took the loss the structure was built to define, not one that threatened the portfolio. The fundamental picture hasn't shifted nearly as much as price has; unless the US soybean yield falls below 51.5 bpa, current levels look unsustainable to me. Corn needs more time — final yield and the Ukraine export picture both remain open questions.