US grains and soybeans: Rally or short squeeze?

After months of grinding losses, the US grain and soybean sector has suddenly come alive. Over the past three weeks, the Bloomberg Grains Total Return Index — tracked by several leading ETFs — has rebounded sharply, cutting its year-to-date loss to just 1%. On a year-to-date basis, the turnaround has been led by soybeans (+13.8%) and soy oil (+24%), while soymeal (-5%), corn (-8.6%) and wheat (-9%) continue to lag. The timing and drivers of the move, however, raise more questions than answers, particularly given the data blackout from the USDA and the absence of positioning updates from the CFTC.

With the last Commitment of Traders report dated September 23 showing managed money accounts holding net short positions across all major grain and soy contracts, the sharp rebound that followed looks, at least for now, more like a short-covering rally than a sudden surge in demand. The lack of fresh data has amplified market moves, leaving traders to fly blind during one of the most critical months of the year — the peak of the US harvest — when updated yield and production estimates usually help define price direction heading into winter.

Trading without a compass

Since October 1, the ongoing government shutdown has suspended several key USDA and CFTC reports, including the all-important World Agricultural Supply and Demand Estimates (WASDE). These updates normally provide insight into how much of the crop has been harvested, how yields are evolving, and what the balance sheets look like.  Note, the USDA has notified the market that they aim to publish crop production and WASDE reports on Friday, 14 November

That uncertainty has created the perfect conditions for a squeeze. With many funds already positioned for further weakness, a mix of improving sentiment around US-China trade and a temporary tailwind from stronger energy prices — supporting biofuel margins — has forced traders to cover shorts positions. In effect, a modest shift in fundamentals has been magnified by short covering amid poor visibility and low conviction.

China: from promises to purchases

At the center of the renewed optimism is China. According to the latest understanding between Washington and Beijing, China has agreed to buy 12 million metric tons of US soybeans between now and January, followed by a minimum of 25 million tons annually for the next three marketing years. If delivered, that would mark a major shift back toward pre-trade-war volumes and provide much-needed relief for US farmers.

However, as always, the market wants proof. Early signs suggest that Chinese crushers have continued to buy opportunistically from Brazil when prices allowed, and until US export inspection data confirm a meaningful pickup in loadings, traders will treat these commitments with caution. Time is also becoming a factor — for soybeans to arrive at Chinese ports in December, shipments need to begin imminently. Weekly export inspections therefore remain one of the few hard data points available to assess whether China is acting on its pledges.

Contango and the cost of time

Despite the recent bounce, the market structure still tells a story of abundant supply. The forward curves for all major grains, soybeans being the most notable exception remain in deep contango, reflecting comfortable inventories and limited near-term scarcity. Wheat futures for delivery in 12 months trade roughly 11.7% above nearby prices, while corn is 8% higher on the same horizon.

In a contango market, futures prices are higher the further out you go, meaning a trader holding a long position and rolling it forward each month effectively sells a cheaper nearby contract and buys a more expensive deferred one — a process that incurs a negative roll yield. The opposite holds for short sellers, who benefit from this carry as they sell high and buy back lower-priced nearby contracts as time passes. As long as spot markets remain well supplied and storage capacity is plentiful, the curve itself works against long-only investors and quietly rewards shorts for patience.

That is why the sustainability of the rally depends less on headlines and more on evidence of tightening conditions — stronger basis levels, narrowing spreads, and a visible pickup in export flows. Without that, time will erode the gains through carry costs and renewed speculative selling once the short covering exhausts itself.

Outlook

Given the combination of strong harvests across the US, Europe, the Black Sea region and Australia, the broader backdrop remains one of plentiful supply. The current rally therefore looks less like the start of a new bullish cycle and more like a short-term correction driven by positioning, thin liquidity, and speculative covering in the absence of reliable data.

In the near term, the fate of soybeans will hinge on whether China follows through on its promised purchases. A sustained improvement in US export flows could justify further upside and help flatten the curve. But if those cargoes fail to materialize, the market will likely revert to trading the fundamentals — large inventories, soft feed demand, and the drag of negative roll yield — all of which argue for consolidation rather than continuation.