Will $13 Do? Or is There More?.... I say More!

January-15-08

USDA dropped soybean yields by .1 bushels to 41.2 bushels per acre in the final 2007 yield estimate. This reduced the size of the crop and ending stocks by about 10 million bushels. Ending stocks were reduced from 185 million bushels to just 175 million. This represents only a 21 day inventory at the end of August 2008 and means stocks simply cannot get much tighter.

The mere 21 day supply bears special. The key point is that prospects are growing for potential food emergencies in 2008 due to severe domestic shortages of basic food crops. The year of 1973 deserves special attention and review. In the fall of 1972, the former Soviet Union largely bought the entire U.S. wheat inventory. The, soybean futures moved above the astonishing price of $5.00 a bushel for the first time ever in January of 1973. By late May of 1973 the realization hit the market that foreign buyers would not slow down purchases and that we would simply “run out” of beans before the new-crop could be harvested. Soybean futures began to surge in late May moving from about $8.00 a bushel to the record futures high of $12.90 by on June 5, 1973. In 12 trading days soybean futures surged nearly $5.00 a bushel. The situation was near desperation. Markets had not performed their duty of forcing end-users to cut back. Foreigners were buying our own U.S. food away from our own U.S. consumers. There were cries for the federal government to do something. And they did. In July 1973, they embargoed all exports of soybeans to any foreign country. Even with the export embargo in the late summer, soybean stocks at the end of the market year still dropped to 17 days use.
So, the 21 day supply this summer brings the question of could we be facing a potential crisis of 1973 proportions? The answer is that we are not quite to that point yet , but continued strong export sales, or a weather lowered harvest in South America would move us closer to the 1973 analogy. In fact, to reach 17 days this year means that ending stocks need only fall from USDA’s current 175 million to 140 million.

The surprising drop in 2007/08 corn carryover by 359 million bushels meant that corn prices have to rise to keep soybean and wheat acreage from being as high in 2008. This puts added upward pressure on new crop bean prices. World ending stocks also tightened by 40 million bushels as USDA lowered the anticipated size of the upcoming Brazilian crop by 55 million bushels.

Foreign countries have remained aggressive buyers of old crop soybeans even in the face of rising prices late in 2007. As of January 4, export commitments for the 2007/08 marketing year were running two percent ahead of last year at this time. USDA analysts on the other hand say foreign buyers need to cut total purchases this year by 11 percent.

China continues to lead export buying and is up 14 percent from last year at this time. Japan, Europe, Taiwan, and South Korea all are lagging in purchases for this marketing year. Those countries may have to become more aggressive buyers in the next several weeks. In addition, China may also need to be a more aggressive buyer if they fear world soybean stocks are tightening further. Plus, any added weather threat to the size of the South American crop could also cause panic buying.

The supply situation seemingly won’t improve this fall after the harvest of the 2008 crop, even assuming an eight percent increase in U.S. acres and normal yields. This indicates the 2008/09 crop prices must remain very high to keep end-users demands constrained.

Futures prices in recent days have established new all-time highs for the lead contract at $13.41 on January 14, 2008. This new high was not simply a retest of the $12.90 per bushel 1973 high, but blew through it by nearly $.50 per bushel.

Markets often consolidate for a period of time around those old $13 highs. That may be the case this year as well. Markets consolidate because there is such large uncertainty about what prices should be. Traders tend to want to gather around anything that gives some historical comfort. What markets really are waiting on is additional information of whether this higher level has cut end-users enthusiasm for buying soybeans, or whether prices have to go higher yet to convince a sufficient number of end-users that they will adjust their buying programs.

Market participants will watch for three key fundamental indicators in coming weeks. First, weekly export sales may be the most important. Will foreign buyers slow old crop purchases, or will they exhibit a panic buying mentality? At the current pace of export purchases, the U.S. could virtually be sold out of old-crop beans in 6 or 7 weeks. Secondly, how quickly will the market receive signals of cut-backs in soybean meal usage from the livestock sector? And third, weather conditions in South America.

We can have no assurances that soybeans have reached their highs. Fundamentals still appear bullish. However, markets are at record high levels and selling some inventory near these records seems prudent.Technically, as we said in last month’s update objectives for higher prices might be set at $1.00 intervals with FUTURES at $14.00, $15.00, and $16.00.

Historic price patterns show the March to May time period as a favorable timing window for pricing soybeans. That seems reasonable this year as well. As with corn, we will suggest that those who are not at least 40% sold on old-crop would want to do catch up sales now and then plan to move to about 80 percent sold by soybean planting season in May.

New crop soybean futures are not behaving like 1973. In that year the tightness in old crop was going to be resupplied by the fall of 1973 harvest. On the day old-crop 1973 futures reached their peak at $12.90, the new-crop futures closed at $5.70 per bushel. For 2008, new crop futures are comparable to old-crop. The point of this relationship is that market participants realize that the 2008 crop will not be sufficient to resupply soybeans and thus we will see continued high prices.

Having 35 to 40 percent of new crop beans priced in the March to May period could be considered. Some will want to move to higher levels given the record high new-crop pricing opportunities. Another favorable way to get some new-crop priced is to consign some new-crop bushels to an elevator pricing program that sets prices at the average price over a late-winter to early-spring pricing window. The big advantage is that once those bushels are consigned to the program, the produer does not have to make further pricing decisions on those bushels. This helps take the emotion out on those bushels.

As with corn, the next 90 may be the period crop producers have waited a life time for. Get your plan together and follow an orderly procedure of pricing additional amounts of both old and new-crop at some of the highest opportunities ever experienced.

Chris Hurt
January-15-08
Purdue University