Early cut to soy stocks signals further tightening ahead

CHICAGO - The U.S. government's quick cut to its domestic soybean stocks forecast suggests that supplies, currently under pressure from rising export demand, will remain tight for more than a year.

The U.S. Agriculture Department earlier this month lowered its outlook for 2016/17 U.S. soybean ending stocks by 14.8 percent to 260 million bushels. The reduction - the USDA's biggest-ever cut for soybeans in June - came just one month after it issued its initial forecast for the marketing year.

A further tightening of the balance sheet could lend support to an already strong price environment for soybeans, analysts said. The most actively traded Chicago Board of Trade soybean futures contract rallied 25 percent this spring, peaking at its highest level in nearly two years.

The spring rally stemmed from a bump in export demand for U.S. supplies amid problems with the South American harvest. Worries about crop development in the midwest could fuel further gains.

Uncertainty about the U.S. soybean harvest amid concerns about a dry and hot summer will likely extend the rally for the next few months, said Malinda Goldsmith, a partner at Four Seasons Commodities, which manages a portfolio of about $125 million commodity investment.

Farmers will not have visibility until August on whether their crop will be big enough to replenish the supplies which were drained by the South American shortfalls.

'We are on the razor's edge for carry-out when it comes to soybeans,” Goldsmith said. 'We do not have a cushion for crop adversity in soybeans.”

The market already is turning its attention to U.S. weather even as farmers finish up seeding, with gains in new-crop futures outpacing gains in the nearby July contract during June.

During the last 20 years, the USDA has cut its new-crop stocks estimate nine other times in its June supply and demand report. In seven of those years, the final stocks figure has turned out to be even lower than the June estimate.

Stocks have come in higher only once following a June cut - in the 2005/06 marketing year. Final figures are not in yet for the 2015/16 crop year but the latest projections show end stocks 105 million bushels less than the forecast the government issued in June 2015 as the increased export demand has soaked up much of the soybean surplus.