Better Bean Prices Still a Year Away?

June-09-06

Soybean fundamentals have been bearish since last summer, yet prices have generally avoided falling backward to the lower $5.00 range. One reason has been that general commodity inflation has encouraged purchasing by speculative interest that has helped keep prices somewhat higher than fundamentals would suggest. There is now some sense that the peak prices have been established for commodities and that this will serve to deflate soybean price closer to prices suggested by the current excessive supply relative to demand.

The topping of commodity prices is potentially exhibited by the gleaming commodity leader known as GOLD. One year ago, gold was $420 per oz. with the price surging to $730 by May 12th of this year. In the past month, gold has dropped more than 15 percent back to $615. The CRB index (a multiple commodities index) is off about 7 percent since early May again reflecting a weakening of commodity prices more broadly.

U.S. soybean stocks are at 20 year highs. U.S. exports remain disappointing, and world stocks are estimated by USDA to reach new high records for the 2006/07 marketing year. Adding to these bearish concerns is a reasonably good start to the 2006 growing season. Does this mean that bean prices are in trouble?

My view is that cash soybean prices are likely to drop 40 to 50 cents per bushel by mid-July or early August. Assuming no major weather threats, harvest prices may be reached by early August, with price recovery not beginning until after corn harvest is complete. November soybean futures could move back downward to the $5.60 lows made last November, and with basis levels at 35 to 45 cents under the November, cash prices in the central portion of the state would be $5.15 to $5.25 by mid-July to August. Northern Indiana prices are about 5 to 10 cents lower and Ohio River markets are about 15 cents higher than central Indiana. If weather should provide above average yields, central Indiana harvest cash prices could fall below $5.00.

Prospects for these reductions means producers should continue to market their 2005 crop in an orderly fashion by now holding only inventory they are willing to speculate for a weather event. Current opportunities to forward contract new-crop are currently thought to be better than what will be presented at harvest, assuming a normal size of crop.

There will be positive incentives to store soybeans this year, but the market will likely signal even bigger returns for corn storage. Those with limited space may want to plan to store corn and move more soybeans off-farm this fall. Some may be able to put their soybeans in permanent on-farm storage and use some form of on-farm temporary space for part of their corn. Others may still be able to get new storage bins built this summer.

When will the overall price situation improve for soybeans? My target is the spring of 2007. Why? The large growth in corn use for ethanol will require corn production of near 12 billion bushels for the 2007 crop. This means planted acreage will have to rise from my count of 79.5 million acres this year to about 88 million acres by 2007. This increase of 8.5 million acres will largely come from a reduction in soybean acres which will trim the anticipated 2007 crop by 300 million bushels, or more, and help reduce the current burdensome stocks levels to something more manageable. The problem is that we are still nearly one year away from market participants talking of tightening stocks levels.

The above scenario then suggest that cash soybean prices could recover from the low $5.00 level this summer and fall to something more like $6.25 to $6.75 by the spring of 2007. If that were to occur, it would be a very good year to speculate on storing soybeans.

The current market’s signals are that net storage returns for soybeans will not be as favorable as for corn storage. Using the closing futures on June 9th and rounding to the nearest whole cent, the November 2006 futures were $6.16 and with a 45 under basis is a harvest cash price of $5.71 per bushel. July 2007 futures were $6.41 with an anticipated $.15 under basis in early June 2007 is a cash bid of $6.26. The difference is $.55 per bushel which is similar to corn, but interest costs are about $.04 per month or $.33 to store from early October through early June 2007. Thus the return after interest is only 22 cents per bushel for soybeans compared to about twice that amount for corn.

The theme for soybeans is to try to hold on long enough to get to better prices into 2007. Better days seem to be coming, but they may still be nearly a year away and this means borrowing money to store. And before we can get to those better days, we must face massive supplies of soybeans this fall and terrible basis levels.

Chris Hurt
June-09-06
Purdue University