Soybean Prices Still Climbing—Maybe More To Come!

February-16-08

Our foreign buyers have kept up a rapid buying pace even in the face of much higher prices. This caused the USDA to revise exports upward by 10 million bushels in the February update. In addition, domestic crush was increased by 5 million bushel due to a high rate of meal exports. As a result of this strong usage, ending stocks were dropped to an estimated 160 million bushels at the end of August. This represents only 19 days supply and can be compared with 17 days in August 1973 when the U.S. government placed an embargo on soybean exports during the ’73 summer.

Export commitments for the marketing year to-date are about two percent ahead of last-year, however, we can only sell about 90 percent of the beans we did last year. If we sell more than 90 percent, then every additional bushel sold will mean U.S. consumption will have to be reduced by that bushel, or we will be importing soybeans from South America by the end of summer.

The additional amount of old-crop beans we have to sell to foreigners is nearly gone and the rate of foreign purchases is increasing. In the most recent four weeks, U.S. export sales have actually increased by four percent compared to the same period last year. At the current rate of export sales, the U.S. will be out of available old-crop inventory by the end of February. Then the world must shift to South American soybeans. Any further old-crop export sales of U.S. beans after February sharply increases the risk of soybean shortages this summer in the U.S. It is a dangerous “short-supply” situation for the U.S. consumers of soybean oil and soybean meal, with only 1973 as a precedent.

The size of the South American crop will be critical. USDA estimates are for South American production to be up two percent this year compared to last year, after a 19 percent smaller U.S. crop last summer. South American production will represent 53 percent of world production for the 2007/08 marketing year. USDA did not change their estimate of the size of the South American crop in February and weather conditions there have had some areas of excess wetness in Brazil and some concern over dryness in parts of Argentina. However, those concerns appear not to be major yield reducing factors.

Soybean futures prices made new highs after the February 8th USDA updates. The March contract as an example reached $13.865 on February 15. This was the highest price ever for the nearby soybean futures contract. Movement to new futures highs now places the next objective near $15.00 per bushel. As in past reports, I have suggested adding to soybean sales in $1.00 futures increments at $14.00, $15.00, and $16.00.

A favorable historic pricing window for soybeans has been in the March through May time period. We are now moving into that window and thus should consider an orderly sales program in that window. As with corn, a standardized strategy may be to move old crop sales to at least 40 per cent sold immediately, and then move that up to 75 to 80 percent through the window. On new crop, having 30 to 40 percent forward priced by June could be considered. These are guidelines, but even if bean prices do not reach the “in the teens” levels mentioned, carrying through on pricing in the window could be considered.

New crop soybean futures prices are overpowering new crop corn futures. Expected returns per acre remain nearly $30 higher for soybeans than for corn on average Midwestern soils (using Purdue budgets ID-166). This means excessive price favoritism for soybean acres. Thus, we can expect the Prospective Plantings results released by USDA on March 31 to show excessive soybean acreage for 2008 relative to corn. This has the potential to be bearish for new crop soybean futures and may be an encouragement to get at least some new crop priced prior to the March 31 release date.

Crop insurance decisions are more critical than ever. The potential for extreme variation in soybean prices must not be overlooked. The possibility of having $3.00 to $5.00 per bushel ranges in soybean prices in 2008 is very real. Thus, there is extreme uncertainty. Crop insurance will be expensive, but it can be used to protect extremely high levels of revenue. In addition, it does not restrict the possibility of having even better than expected outcomes in the event of high yields and/or high prices.


Use of This Information: This information is based upon current evaluations by USDA and Purdue analysts. While it utilizes the latest known information, future outcomes can be much different due to shortcomings in analytic methods, to inaccurate anticipation of future events, and to unforeseeable new events. Ultimate outcomes are often different than provided in the outlook. Thus, this information should be used in conjunction with other outlook sources and decision makers should always evaluate how a range of potential outcomes would impact their firm or organization. Purdue University is an affirmative action/equal opportunity institution

Chris Hurt
February-16-08
Purdue University