Soybeans Prices Will Follow Corn Prices!

January-13-07

Soybeans have become even more of a corn follower as the bullishness of the corn market has increased and the bearishness in the bean market has increased as well. This means that corn prices must move up relative to soybeans over the next few weeks providing an even greater incentive to plant more corn acres relative to soybeans in 2007.

USDA made modest adjustments to 2006 soybean production which reduced the size of the crop by a mere 16 million bushels in their final estimate. Export usage was reduced by 25 million bushels as a result of somewhat larger expected production in Argentina. Ending stocks rose by 10 million bushels to 575 million. Overall this was a ho-hum soybean report, but the bullishness in the corn market led to a buying spree in the soybean pit.

Corn prices and soybean prices are linked at the hip for the 2007 crop because much lower soybean acreage will result in much tighter inventories. Thus, since both corn and soybeans compete for much of the same land, especially in the Midwest, their prices are related over time.

To predict the direction of soybean prices right now, consider the direction of corn prices. So please read my corn outlook which is very bullish. Old crop soybean futures have been trading at about 1.8 times the price of old-crop corn futures. Thus, if corn futures go to $4.50 this might imply soybean futures perhaps moving on up to around $8.00 per bushel. Corn futures approaching $5.00 per bushel could mean soybean prices near $9.00. These are lofty prices given the near-record ending stocks-to-use ratio both in the U.S. and the world.

As prices move upward, at some point soybean prices may have to disassociate themselves with corn prices, because while old-crop corn usage may need to be cut somewhat, soybean usage does not.

USDA increased production prospects for Argentina by 18 million bushels, but left anticipated Brazilian production unchanged. Weather in South America has been favorable so far for soybean development. Weather there will be a factor in the direction of winter bean prices but seems to be non-threatening right now.

Soybean exports continue to be strong with commitments so far this marketing year up 37% compared to the USDA’s estimate of an 18% increase in exports for the entire year.

The drop in soybean acres that will be reported in the March 30th Prospective Plantings report will become an increasingly discussed number. If corn acreage is up 10 million or more acres as I would now expect, this means that soybean acreage could be down 7 to 8 million. With normal yields this means a crop in the range of only 2.7 billion bushels, a decrease of nearly 15%.

Recommended pricing levels for the old-crop are now higher, but less clear. Probably the best guideline is to closely follow the corn market and watch for peaking action there over the next two to four months. While the soybean market has reasons to follow corn, the huge old-crop inventory means that at some point huge volumes of beans will be sold. This should encourage some producers to be more aggressive at selling a larger portion of old-crop beans on this rally.

Timing strategies can also be used to provide guidelines for when to price. Those historic patterns show that the best time to price old crop soybeans on average is in the mid-March to mid-May time period. Looking more closely at just the high priced soybean years shows that again, the best timing is in that same time window.

Not surprisingly, late-winter and early-spring has also been a good time to price new-crop soybeans as well. The standard pricing of 25% to 35% in this time window might be a good anticipated guideline for this year as well.

Harmful growing season weather in 2007 will cause the strongest bullish pattern for corn, but soybeans would move up sharply as well. Thus, having the opportunity to gain from summer price increases can be done in a number of ways including: holding on to a some what greater percentage of old-crop inventory; by selling cash beans in the spring and buying futures contracts to replace them; and by selling cash beans and replacing with call options. These futures and options positions can generally be executed at grain elevators (if attached to a cash contract) or with a commodity broker.

Chris Hurt
January-13-07
Purdue University