Dalian Commodity Exchange Factor Weighs on Soybean Prices

The main news here is that a series of soybeans futures and options had opened for trading on the Dalian Commodity Exchange (DCE) to foreign traders on Dec. 26. This means China is better positioned now to get this vital commodity at discounted prices through exchange betting advantages. That also allows foreign commodity traders to hedge their risks and facilitate further linkage between domestic and overseas soybean prices.

Speculators cranked up bullish bets in Chicago-traded corn and soybeans last week as U.S. government data revealed smaller domestic crops than analysts expected, keeping supply scenarios tight through at least mid-year. Speculators held 168,380 soybean futures contracts last week, solidly higher than 132,647 contracts the previous week, representing the largest bullish position since Apr. 19.

The ongoing drought in Argentina also triggered fund buying last week in corn, soybeans, and soybean meal, forcing another managed money (AUM)  record in the latter. The country is expected to produce 45.5 million metric tons of soybeans this year, which – if realized – would be up from 43.9 million tons a year earlier.

January is usually a quiet month for crop production data. However, the markets were surprised when the U.S. Department of Agriculture (USDA) released a series of reports on Jan. 12, showing unexpected reductions in U.S. soybean and corn production estimates.

Although the soybean harvest area was within the trade expectations range, the soybean crop for 2022 was not. The USDA estimated that the average crop was 49.5 bushels/acre – 0.7 less than the November estimate and 2.2 bushels below 2021. It also fell short of the full range for trade expectations.

The USDA forecast the U.S. carryover of soybeans on Sept. 1, 2023, at 210 million bushels, down 10 million from its December projection and down 64 million bushels, or 23%, from 2022. The USDA also lowered its soybean export forecast to 1.990 billion bushels, down 55 million bushels from the December outlook and 168 million bushels, or 8%, from 2022.

Money managers' extension of net longs in CBOT corn, soybeans, and meal in the week ended Jan. 17 resulted from new gross longs, which were especially numerous in corn and beans. All three contracts posted multi-month highs in most actively traded futures on Jan. 18 and continued moving in the same direction as the first 2023 month progressed.

As of today, Jan. 30, snapshot, there are several traditional upward pressure factors for soybean futures going forward, and expectations of “sticky inflation” voiced by several prominent economists, including Mohamed El-Erian, add to them profoundly. At the time of writing, the front-month March contract, ZSH23, is trading at around  $1531 per 5,000 bushels, +1.49%, almost reconfirming the Jan. 18’s high.

However, we highly recommend tracking events and news around the launch of the Chinese soybean futures trading at the Dalian Commodity Exchange because they may become a game changer when it comes to soybean price formation patterns.