Soybean Market Research - Weekly

Thought of the Week


The focus of the discussion today will be on soybean inventory. The timing of the selection of this topic is not random. We move closer to the start of harvest of the new Brazilian crop which, together with inventory changes, will dictate the supply of soybeans in the short to medium-term.


We begin by plotting the 10-year average inventory cycle on Figure 1 where we see de-stocking pressure running from August to April. This is followed by sharp re-stocking effort (not surprisingly coinciding with the S. American crop cycle). It is worth noticing that the de-stocking cycle of this market is exactly double the time required for re-stocking. Such observations are hardly news, but they help us set-up the modelling process explained thereafter.


We continue by establishing the ownership of this inventory which is likely to provide early evidence for re-/de-stocking pressure. We hypothesize that, if the share of soybean stocks held by importers is rising, the pressure on demand will grow. The opposite should also be the case. We borrow this idea from our EU natural gas research platform where we constantly monitor the ownership of storage capacity and gal holdings.


We construct Inventory ownership share diagram (Figure 2a) where the evolution of the relationship between the two variables since 2019 is clearly visible. Not surprisingly, the link between price and ownership share is

strong. Our concern after testing it, is that the relationship is simply coincidental.


Therefore, we make one final data transformation and construct an Inventory Distribution Index which attempts to capture the shift in ownership over time. The result displayed on Figure 2b is unambiguous even for the naked eye - change in the distribution of inventory ownership does posses lead properties over soybean price. Such results gained this index a place in the proprietary soybean systematic fundamental research platform.




 

Short-term Fundamental Market Conditions


Short-Term Supply


•Supply of soybeans on the global seaborne market increased in Q3-Q4 2021 which had sobering impact on price – see Figure 1.

•The tightness that emerged towards the end of Q4 2021 helped to stabilize the price and supported the subsequent rebound. Current supply conditions continue to be supportive of further price strength, subject to the pending S. American export season.



Short-term Demand


•We have documented the exceptional demand strength in all our grains publications since Q3 2020. That positive demand shock dissipated in Q2 2021 – see Figure 2.

•The result was a severe price correction from 1650 to 1200 within 20-22 weeks.

•Demand is showing tentative signs of recovery from the start of 2022 which is supporting the on-going price rally.



Short-term Macro


•The aggressive reduction in speculative net long positions on the global futures soybean market contributed to the (long overdue) price correction – see Figure 3, weeks #20 to 44.

•As it stands today, the data is suggesting that buyers are gradually returning with an increase in the net long bias.





 

Systematic Fundamental Research Platform


The information displayed below is part of the Level 2 access to the Marex Research analytical platform. The signal is generated by a proprietary systematic fundamental algorithm and, for this publication to comply with the latest MIFID II requirements for client marketing communication, it is delayed by minimum of 30 trading days.


Ours is a unique methodology developed in close co-operation with academics from leading research centers in the field of mathematics, econometrics, physics, and finance. The methodology dismisses the Efficient Market Hypothesis (EMH), and instead focuses on identifying and quantifying mispricing between the market and its fundamentals (such mispricing is not allowed under EMH). As the price ultimately reverts in the direction of the fundamental drivers, we also look for divergence forming between the price and the market bias indicator.




The information displayed on this page is part of the Level 2 access to the Marex Research analytical platform. The signal is generated by a proprietary systematic fundamental algorithm and, for this publication to comply with the latest MIFID II requirements for client marketing communication, it is delayed by minimum of 30 trading days.


Ours is a unique methodology developed in close co-operation with academics from leading research centers in the field of mathematics, econometrics, physics, and finance. The methodology dismisses the Efficient Market Hypothesis (EMH), and instead focuses on identifying and quantifying mispricing between the market and its fundamentals (such mispricing is not allowed under EMH). As the price ultimately reverts in the direction of the fundamental drivers, we also look for divergence forming between the price and the market bias indicator.

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