Soybeans: A Strategic Buy Amid Oversold Conditions

The soybean market is at a critical inflection point. While near-term supply pressures from South American surpluses and profit-taking have driven prices lower, the underlying fundamentals remain structurally bullish. Reduced U.S. ending stocks, extended biofuel demand resilience, and China’s potential return to Phase One purchases create a compelling case for long positions ahead of Q3’s seasonal rally. Here’s why investors should act now.

1. USDA Ending Stocks Signal Tight Supply Dynamics

The USDA’s May WASDE report slashed U.S. soybean ending stocks to 295 million bushels—a 16% drop from 2024 levels and the lowest since 2022-23. This tightness is driven by strong domestic crush demand (+70 million bushels) and global competition for exports. With a stocks-to-use ratio of just 6.7%, the market is highly vulnerable to supply disruptions.

The data shows a clear downward trend in U.S. inventories, despite record Brazilian production (175 million metric tons). While South America’s surplus has temporarily capped prices, it cannot offset the structural deficit in U.S. stocks. Once these supplies are absorbed by mid-year, the focus will shift to U.S. yields and export demand—both of which are poised to tighten.

2. Biofuel Tax Credits Ignite Soybean Oil Demand

The extension of the 45Z Clean Fuel Production Credit through 2031 ensures sustained demand for soybean oil. Producers of biodiesel now qualify for a $1.00/gallon tax credit if their fuels meet low-carbon thresholds. This incentivizes processors to ramp up soybean crush rates, as soybean oil’s default carbon intensity of 40 kg CO₂e/mmBTU (vs. 50 kg threshold) qualifies for $0.20/gallon credits.

Moreover, China’s tariffs on imported used cooking oil (UCO) reduce competition for domestic soybean oil. With Brazil’s biodiesel mandates diverting local oil from exports, U.S. soybean oil is positioned to capture global demand gaps.

Historically, tax credit expansions correlate with soybean oil price rallies. The current oversold condition presents a buying opportunity before Q3’s crush reports confirm stronger demand.

3. China’s Phase One Truce Could Reverse Export Bleed

While China’s 125% retaliatory tariffs have slashed U.S. soybean exports to near zero, state-owned enterprises like COFCO and SINOGRAIN may resume purchases to rebuild strategic reserves. The USDA’s MIRAGRODEP model predicts a 39% decline in U.S. oilseed exports, but non-Chinese buyers (India, Mexico, EU) are filling the gap.

More importantly, the Phase One trade agreement’s expiration in July 2025 could force China to negotiate a new deal to avoid further supply shortages. With Brazil’s logistical bottlenecks and lower stocks, U.S. soybeans may regain favor as a reliable supplier.

Near-Term Risks vs. Long-Term Bullishness

Bearish headwinds include:
- South American surpluses: Brazil’s record crop and Argentina’s stable output are depressing global prices.
- Crush margin volatility: Narrow margins (currently -$0.15/bu) could delay production ramp-ups until 45Z credits are fully implemented.
- Trade policy uncertainty: A Trump administration rollback of biofuel incentives remains a wildcard.

However, these risks are already priced in. The low stocks-to-use ratio and China’s eventual need for U.S. supplies form a floor for prices. By Q3, export demand and crush data will likely surprise to the upside, triggering a rally.

Investment Strategy: Long Soybeans Ahead of Catalysts

• Entry Point: Buy soybean futures (ZS) or ETFs (SOYB) at current levels, targeting $10.25/bu—the USDA’s 2025 price forecast.
• Catalysts:
• June WASDE report: Watch for downward revisions in U.S. ending stocks.
• July crush reports: Confirm 45Z-driven demand growth.

• Trade negotiations: A China-U.S. deal could erase the 125% tariff overhang.

• Risk Management: Set stop-losses below $9.50/bu (2024’s low) and consider call options for leverage.

Conclusion: The Bull Case is Structurally Strong

The soybean market is oversold but fundamentally bullish. Tight U.S. stocks, biofuel demand resilience, and China’s eventual return to purchases set the stage for a Q3 rally. Near-term headwinds are transient; long positions now offer asymmetric upside. Act before the data confirms the bullish narrative—this is a rare opportunity to buy a commodity with legs.