It’s human nature to like our information in absolute and black and white terms. Yes or no, high or low, buy or sell. What about the recent acreage numbers from the USDA – Bullish? Bearish? We want to hear if it’s one or the other.
However, the truth of the matter is that markets operate in a space that contains a lot more nuance and subtlety than most of us would like. Whether a piece of new information is ‘bullish’ or ‘bearish’ is not easy to answer, not without more context. ‘Bullish’ and ‘bearish’ are relative terms, and whether a piece of information falls into one or the other is a result of current prices, market expectations, and timeframes.
Consider soybeans – the market has plummeted 25 per cent in a month and a half. The primary drivers are well known – China targeted U.S. soybeans in their trade war at the same time that crop conditions were favorable. These developments were considered ‘bearish’ to the market. However, it’s important to remember that prices were ‘bearish’ relative to the $10.60 November futures price in late May.
Soybean futures prices are now at their lowest level in a decade, stretching all the way back to the depths of the financial crises. This low is despite the fact the USDA forecast for global soybean ending stocks is only marginally higher than what we saw in the previous two years, and the U.S. carryout is not forecast to increase an enormous amount from what we will end with this crop year.
What does this mean for ‘bullish’ or ‘bearish’? Monday’s soybean crop condition ratings came in at 69 per cent Good/Excellent, above last year and the five-year average. And yet, this news was viewed as ‘bullish.’ Export sales are also coming in a little better than expected. The absolute numbers would not have been viewed as ‘bullish’ in May, but are viewed in friendlier terms after $2.50/bu was taken out of the price. The nature of the piece of information relative to price and market expectations is critical.
Time frames are necessary to consider as well. The last USDA report was deemed to be ‘bearish’ for wheat because U.S. ending stocks were increased by more than what was anticipated. In the shorter term that could be viewed as negative, which is why the Kansas City hard red winter wheat futures price found itself trading down to $4.50/bu, not much above the $4.00 – $4.50/bu range that we saw in much of 2017 when both U.S. and global stocks were higher than what is anticipated today.
When viewed through a longer time horizon, the USDA report isn’t necessarily as ‘bearish’ as it would seem on the surface. While global wheat stocks are forecast to decline modestly from last year’s record levels, supplies in the vital wheat exporting countries will be down substantially. This creates a tighter global market regarding trade and will open up more export opportunities for the U.S. down the road. However, this may take several months to play out, as other exporting countries may need to draw down their supplies before the U.S. plays a more prominent role in world trade.