Soybeans Outperform Wheat Amid US-China Trade Talks and Supply Dynamics: A Contrarian Grains Play

The agricultural commodities market is rarely a straightforward arena, but current dynamics present a compelling contrarian opportunity. While many investors remain cautious on grains due to macroeconomic headwinds and geopolitical uncertainty, soybeans are emerging as a standout performer. Meanwhile, wheat faces headwinds from record global supplies and harvest-driven volatility. This divergence creates a clear strategy: go long on soybeans and short wheat, leveraging supply-demand imbalances and geopolitical tailwinds.

Soybeans: Resilience Amid Favorable Conditions and Diplomacy

The U.S. soybean crop is off to its strongest start in years. According to the USDA's June 1 report, 67% of the crop is rated in good-to-excellent condition, with key producing states like Iowa (81% good/excellent) and Nebraska (63% good) leading the way. Planting progress (84% complete) and emergence (63%) outpace both last year's levels and five-year averages, reflecting the benefits of warm May weather and ideal soil conditions.

This robust crop health contrasts sharply with the skepticism surrounding U.S. agricultural commodities. The contrarian edge here lies in underappreciated demand drivers. US-China trade talks, though far from concluded, have already yielded tangible progress. Partial tariff rollbacks and record May exports of 13.92 million tons of U.S. soybeans to China (up 129% month-on-month) signal a thaw in trade relations. With China's Phase 1 purchasing commitments still unfulfilled, further diplomatic breakthroughs could supercharge demand.

Moreover, soybean futures have quietly outperformed wheat this year, a trend supported by tightening U.S. stocks and rising global protein demand. The USDA's latest estimates project U.S. ending soybean stocks at 245 million bushels—a 15-year low—bolstering price support.

Wheat: The Contrarian's Short Play

While soybeans thrive, wheat faces a perfect storm of oversupply, geopolitical competition, and harvest delays. The USDA's June 1 report noted only 3% of the U.S. winter wheat harvest is complete, lagging behind the five-year average of 7% due to excessive rains in Oklahoma and Texas. Delays risk downgrading crop quality, compounding pressure from global competition.

Russia, meanwhile, has raised its 2025 wheat production forecast to 82.8 million tons, just shy of the USDA's 83 million ton estimate. This output, paired with Black Sea exporters' aggressive pricing (e.g., Russian wheat at $225/mt), has flooded global markets. The result? Global wheat prices are under sustained pressure, with U.S. wheat exports now deemed “uncompetitive” amid a strong dollar and low inspection volumes.

Geopolitical Risks: A Double-Edged Sword

The U.S.-China trade dynamic remains a wildcard. While soybeans benefit from diplomatic progress, wheat faces indirect risks. China's reliance on Russian and Ukrainian wheat imports (aided by lower prices) reduces demand for U.S. supplies. Meanwhile, U.S. tariff disputes with India and South Korea further complicate wheat's export outlook.

Conversely, soybeans' resilience stems from their strategic role in global trade negotiations. As U.S.-China relations inch toward stabilization, soybeans are positioned to capitalize on China's protein demand, which remains insatiable despite macroeconomic slowdowns.

Investment Strategy: Leverage the Divergence

1. Long Soybeans:
2. Target: Soybean futures (ZS) or ETFs like the Teucrium Soybean Fund (SOYB).
3. Rationale: Strong crop conditions, low U.S. inventories, and improving trade ties with China.

4. Risk: Summer Midwest weather (e.g., drought or excessive rain) could disrupt yields.

5. Short Wheat:

6. Target: Wheat futures (ZW) or inverse ETFs like the ProShares UltraShort Basic Materials (LMN).
7. Rationale: Oversupply from Russia, delayed U.S. harvests, and fading export competitiveness.
8. Risk: Unexpected geopolitical disruptions (e.g., Black Sea supply chain issues) could temporarily boost prices.

Conclusion

The grains market is rarely a one-way bet, but the current divergence between soybeans and wheat offers a compelling contrarian opportunity. Soybeans' fundamental strength—bolstered by crop health and diplomatic progress—positions them to outperform, while wheat's vulnerabilities amplify its downside risk. Investors should prioritize soybeans for long-term gains and wheat as a short-term speculative play, keeping a close eye on weather patterns and trade negotiations.

In a market where pessimism often dominates, the soybean's resilience and wheat's fragility present a rare chance to profit from the overlooked.

Data sources: USDA Crop Progress Reports (June 2025), SovEcon/Russian Wheat Forecasts, U.S.-China Trade Updates (DTN, USDA).