In the last two weeks, the soybean price left behind the downward trend that it had shown since the middle of last year and had a strong recovery, to such an extent that it closed the week at USD 383 per ton, when at the beginning of June it stood at USD 347. In other words, an increase of more than 10% was recorded in just one month.

This sharp increase in the price of the oilseed is an excellent opportunity to better understand the functioning of the international financial markets with a practical example of great relevance for the Argentine economy. Why did the price of soybeans correct upwards? Let's review some concepts and indicators.

The first thing we economists are tempted to do is review indicators of soybean supply and demand. Regarding the first, according to the estimate made by the United States Department of Agriculture on June 10; the World production of this crop would reach 318,3 MT (million tons) in the 2014/15 campaign, which is currently closing in South America.

Furthermore, the total consumption it would be 294,0 MT; which results in an increase of almost 21,0 MT in grain inventories.

Likewise, the prospects for the coming campaign are less encouraging. The projection for the offer is 317,6 MT; 13 MT above demand. With which, it would be pushing the soybean stocks to the historical record of 93,2 MT. In this way, the first elements that we can see would seem to indicate that the price should show a downward trend in the medium term.

Financial markets and the price of soybeans

How is it possible then that we observe an increase in price with these prospects of excess supply? The first point to take into account is to observe how financial markets work.

In these markets, the Prices they tend to be especially volatile in the face of news that changes the outlook for the economy. Many times we see stock market indicators react (or overreact) to certain news, where it is expected that they can change future events in some way.

Now, the first thing that must be understood when following asset prices in financial markets is that they fundamentally depend on the expectations.

That is, the price of an asset depends largely on what the market (the average of buyers and sellers) believes it may be worth in the future. This is why prices react strongly to any indication of what may happen in the near future.

When new economic data appears, markets incorporate new information to the assumptions they have about its evolution, and in this way they revalue their assets.

For example, a company that sells a consumer good in the United States depends crucially on the evolution of economic activity in this country. That is why news that shows that unemployment has decreased will tend to increase its contribution.

Another point that must be addressed is that the impact of this news will depend largely on how different the new situation is with respect to what the players had previously been discounting. In other words, the more surprise Be the noticia, the greater the effect that will generate.

For example, if everyone expects the economy to recover, you will discount this when evaluating assets; That is, it will calculate its value taking into account that the economy will be more dynamic in the future.

Otherwise, when it is confirmed that the activity is already having a favorable evolution, the impact will be less, given that this was already taken into account by those operating in the market. The same applies, when the level of activity is unfavorable, although in the opposite sense: the reaction will be a fall in the prices of the main assets (at least those that depend most crucially on the level of activity).

The biggest falls They usually occur when the market forms overly optimistic expectations for a long time, which is commonly known as a bubble. It is curious, but even a good news It can end up having a negative impact on prices if it is not as good as initially expected.

For example, if an economy minister announces a drop in the level of unemployment, the impact can be negative if that reduction is not as large as the markets initially expected.

Economic bubbles are phenomena that manifest themselves as a considerable gap between the discounted price of an asset and its intrinsic value.

The first difficulty in detecting them early is that at the beginning both valuations are - for practical purposes - the same. The other difficulty - more fundamental - is that until now there is no consensus to establish what its causes are. Even, especially in the bubbles that caused major crises, some authors propose their unique and non-systematic nature.

Returning then to the initial example: what has happened to the price of soybeans? That the latest news projects that perhaps next season's harvest will not be as good as expected. 

Does this mean there will be a shortage or that demand will once again outstrip supply? Definitely not. The outlook remains one important surplus of soybeans in the world market. What happens is that this surplus is no longer as large as expected a few months ago.

A clear example of this adjustment mechanism, can be seen in what happened between the last two reports published by the United States Department of Agriculture. In May, it was estimated that soybean stocks at the end of the 2015/16 campaign would reach 96,2 MT. In June, the estimate had been revised downwards to 93,2 MT.

This level of stocks implies an increase of 11,4% with respect to the previous campaign (which would culminate with an increase in inventories of 33,3%), but even so prices reacted upward between both reports, since with the new information is expected leftover soybeans in the markets be less than expected.

The ultimate explanation for the modification of the projections is due to the fact that, in recent days, the climate began to play a determining role in the evolution of prices. The persistent rains observed in some of the most important producing areas of the northern hemisphere suggest that perhaps the average performance of the crops be lower than expected.

In this regard, it is interesting to observe the changes in the futures curve. The latest news shifted the entire curve upward. That is, both the current price of the oilseed and the options to buy in a few months, or next year, increased. However, the effect was not equal.

While on days Actual Price grew almost USD 40 a ton in a few weeks, the effect for the future price was lower: for September 2016, a soybean price is projected at USD 362 per ton, less than 10 dollars above what was expected.

Graph: Evolution of Soybean Futures prices.

Why is the impact different? Because the latest news changed the expectation on the 2015/16 production in the northern hemisphere, which enters the market in the second half of 2015, but they did not modify the forecasts regarding production in the southern hemisphere, which would only be available in mid-2016.

This shows the complications that come with the analysis of prices in agricultural markets. Not only the offer matters, but also the moment in which it can become effective. One more variable that must be taken into account when making projections.