Are Soybean Still a Good Long-Term Investment?

• The Berkshire Hathaway annual meeting gets under way in Omaha Friday, bringing a number of investors from all over the world to town. 
• Though Mr. Buffett has never been a fan of commodities, we can evaluate the ag sector as we would the financial sector, looking for long-term investment opportunities. 
• Despite its high price, the soybean market still looks to be a fundamentally sound long-term investment. 

Friday marks the beginning of Berkshire Hathaway (BRK.A) weekend here in Omaha, one of the two times each year this city in far eastern Nebraska finds itself in the spotlight (the other being during the College World Series coming up in June). Back in the day when I was invited to speak at conferences and conventions, I once made a return flight back into Omaha with a group of excited investors coming to listen to Mr. Warren Buffett speak. The plane was filled with financial chatter, talk of markets and old-fashioned sayings filled with wisdom. In fact, if I recall correctly (or maybe my mind just has me believing it) there was a run on Coca Cola (KO) as the drink cart made its way down the aisle. 

It is a fun weekend, though, and it’s good to see it opening back up after Covid the last couple years. With vice-chairman Charlie Munger having celebrated his 98th birthday earlier this year while chairman and CEO Mr. Buffett is a young 91, I can understand the health precautions that have been put in place. Back before Covid, 2019 if I recall, my son and his four college friends returned to Omaha to attend this annual meeting, and a good time was had by all. The meeting is generational, and as I’ve talked about in this space previously, the next generation of investor can still learn from Mr. Buffett. 

Though it was on a much smaller scale, this weekend also reminds me of when I would give a market and industry outlook at a corporate annual meeting. A number of years have passed now, and if I were to do it again I’d likely take more of an investment view on ag markets than the usual “markets could do this, this, and this…”. This could be an exceedingly long piece, but a quick summary is I would focus more on the value and/or growth potential of the various ag and ag-related markets. 

The first thing would be to look at forward curves. Here we see most of the grain and oilseed sector markets, as well as a number of softs (e.g. cotton (CTZ22)), are inverted. This tells us long-term fundamentals are bullish, meaning from a fundamental point of view there is still value and growth potential. That seems counter-intuitive with so many markets pressing toward new all-time highs, but the reality is most of these markets have not found the tipping point where demand has started to slow due to tight supplies. We can also see this by studying the Barchart National Price Indexes for the various grain markets as well. For example, the Barchart National Soybean Price Index (ZSPAUS.CM) (NSPI) is showing a daily average for the 2021-2022 marketing year of $13.77, second highest on record to only the 2012-2013 marketing year national average cash price of $14.52. However, Thursday’s calculation of the NSPI came in at $16.45, meaning unless something dramatic happens to the US cash market the daily average will have eclipsed the previous high by the time we get through August. 

What does this tell us? I’ve long argued there is a strong correlation between cash price and stocks-to-use, and my studies are running at an r-squared of just about 100%. Given this, if the average cash price goes to an all-time high the implication is available stocks-to-use have gone to all-time lows. Notice I’m not talking about ending stocks, but stocks-to-use, the bottom-line supply AND demand measure. So if available stocks-to-use are record tight, and the soybean forward curve is showing a strong inverse through the 2024-2025 marketing year, then the US soybean market would still be viewed as a good investment opportunity despite its high price.