Will the Soybean Bull be Unleashed?

October-18-07

In 2007, the big bull market has shifted from corn in early 2007, to wheat in the summer, and now potentially on to soybeans. Why?

Let’s start with a Surprise! National soybean production was lowered by 21 million bushels in USDA’s October production update. Yields were left at 41.4 bushels per acre, but planted and harvested acres were lowered by 447,000 acres providing the reduced crop size. Ending stocks remained the same at 215 million bushels, an accounting number that basically means minimum stocks by the end of next August. The more important question is who will cut back their usage by 112 million bushels compared to the 2006/07 marketing year. USDA’s answer for now is that it will be foreign buyers who will purchase 143 million fewer bushels.

Will that happen? Given the record weak U.S. dollar and a tremendous Chinese appetite for soybeans the question becomes will the cutback come in exports or will prices have to move higher yet to force greater cutbacks in U.S. usage? Of course another critical component of just how high soybean prices will go in late 2007 and into this winter is how many acres get planted in South America, and of course their yield prospects into January and February.

A quick look at export commitments so far this year shows that the world’s buyers have reduced purchases by 5% for the 2007/08 marketing year compared to the same point last year. However, USDA’s balance sheet says exports will have to be reduced by 13%. This means that the current export pace will have to be cut somewhat. However, there has not yet been a buying frenzy in soybeans as was seen in wheat and to a somewhat lesser extent in corn in recent months. This may because world buyers know that South America can still respond with more acres and good yields, greatly expanding world supply of soybeans by next spring. However, this also puts great pressure on those acres to get planted and on weather to provide those good yields in the coming five months.
USDA has acreage in South America rising by nearly 6%, but production only by 3% due to record high yields in both Argentina and Brazil last year. Planting conditions, at least in Brazil, have been dry.

Soybean prices rallied from mid-August to late September. Harvest prices have generally been in the lower $9 range. Basis levels are weak through harvest at generally at 60 to 70 under November futures throughout Indiana. Those basis levels should improve sharply in November once corn and soybean harvest is wrapped-up. Farmers are expected to hold very tightly to inventories after harvest, again providing encouragement for stronger basis.

Futures prices will be guided by the rate of export purchases and by weather in South America. In addition, soybean speculators have tied this market to the weak dollar and oil prices. A weaker dollar and higher oil prices will tend to strengthen soybean prices as well.

Futures may be quite volatile in upcoming months. Extreme weakness of the dollar, rapid export purchases, and unfavorable South American weather are all forces that could move futures to $12 per bushel this winter. Alternatively, if those issues do not develop in a bullish manner for soybean prices, it is not unrealistic to talk of $8.00 futures prices next summer if record yields are achieved in South America and U.S. acreage rises 8% to 10% as currently expected. The point is that the potential for a $4 per bushel range has measurable odds of occurring this marketing year ($8.00 futures to $12 futures).

Thus we see the potential for a high risk price environment and thus an orderly marketing plan should be developed. The first part of that plan should involve storage. Bids for late next spring and summer are expected to be about $.85 to $.90 per bushel higher than harvest time. This means that it will likely be profitable to price beans for deferred delivery out of storage. The optimum delivery date now appears to be next June for movement out of storage.

The questions of when to price are more difficult. Generally soybean futures provide reasonable pricing opportunities from mid-November into the first week of December. For beans that have to be priced in November to January, this is a reasonable time frame to consider doing so. Again, for on-farm storage consider pricing, but for delivery next June. This can be done with forward contracts, hedge to arrive contracts, and of course by selling futures for those that use brokers or commodity advisors.

The next seasonal pricing window for soybeans tends to come from mid-March to Mid-May. Consider finishing pricing of old crop beans and starting new-crop sales at that time. U.S. weather will be vital next summer, so holding some inventory into next summer is also a reasonable strategy. Also consider selling all old crop soybeans by next spring and buying some September 08 call options on a portion of the crop to provide gains from summer ’08 weather problems.

We probably are in for some wild soybean markets in coming months and it is always difficult to “pull the trigger.” This is where a well thought out plan is helpful. That plan should provide specific price targets and follow-up strategies such as buying call options after sales are made. That plan should have both upside and downside price objectives. Having a plan is good, but then we have to execute that plan when the time arrives.

Chris Hurt
October-18-07
Purdue University