Soybean Prices Take a Back Seat For Now

April-12-08

The bull in the soybean market has been calmed, at least for now. A host of factors have changed since July soybean futures peaked at $15.96 on March 3, 2008. The costs of holding futures positions in soybeans increased in early March leading to some liquidation of long positions by hedge and index funds. The South American soybean harvest has been ongoing bringing favorable yields out of their fields. USDA increased the ending stocks of soybeans for the 2007/08 marketing year from a desperately tight 140 million bushels to somewhat higher at 160 million bushels. And of course, U.S. producers said they are going to plant a lot of soybeans this spring.

The larger supply of old crop soybeans was hinted at in the Grain Stocks report which indicated that soybean stocks on March 1 were about 75 million higher than anticipated. This means there were more beans in inventory than could be accounted for given the production estimate from last year’s crop and the measured usage so far this marketing year. This means there are likely errors in either the usage or in the size of last year’s crop. Right now the odds favor that the 2007 crop was actually 50 to 70 million bushels larger than USDA now has estimated.

So, there are some unexpected additional old crop bushels and producers say they will increase bean acres by 18 percent to 74.8 million acres. If that acreage were to get planted with normal yields, ending stock for the 2008/09 marketing year would increase by near 100 million bushels and average price received by farmers might drop to $9.25 for the crop year average.

This is not however likely since incentives to plant corn over soybeans increased sharply during March and April (see corn outlook). It is more likely soybean acreage will be about 3 million lower at 71.8 million acres which means with normal yields, ending stocks remain in the 160 to 200 million range and prices average closer to $10.50 per bushel.

The forecast through April 25 remains wet for the Midwest. This factor would be bearish to old-crop soybean prices. However, soybean prices are also greatly impact by outside markets such as the weakening U.S. dollar, record oil prices, and gold prices. At this point, these outside markets are exerting upward pressure on soybean prices. That upside might be up to $14.50 per bushel on July futures, while the downside could be to $12. That is a $2.50 range on prices over the next couple of months.

Basis levels should continue to improve over the next few months. Old crop soybeans will be in tight supply and strong farmer holding during the planting season should also help to improve basis levels further. This means cash soybean prices could range from about $11.50 to $14.00. Moving old crop sales up to 80 per cent sold by the end of May is the normal objective at this time of year.

For new crop, we expect to see planted acres drop about 3 million and soybean ending stocks to increase from 20 to 40 million bushels compared to the 160 million number for 2007/08. With normal yields, this could mean that harvest time cash prices could be in the $9 to $10 range. Look for November futures to trade between $11 and $13 over the next month or so. Thus, forward cash pricing opportunities may be in the $10 to $12 range. Certainly establishing cash prices above $11 appear to be a prudent decision at this time.

Basis bids are dismal for new crop at $.80 under to $1.20 under the November futures (lowest basis is at crushing plants and the largest basis is at country elevators). Elevator managers are very concerned that historic futures/cash relationships may not hold in such volatile markets. For this reason, they are forced to widen their basis bids to hopefully cover the huge basis risk they are subject to. If a reasonable growing season develops this summer, then the basis fears will be reduced and return to more acceptable levels. This means soybean basis might return to $.40 to $.80 under November, which would be an improvement of about $.40 per bushel.

What strategies would allow a producer to do some pricing on new crop futures but still speculate on an improving basis? That would be “Hedge to Arrive” contracts at the local elevator, it they are offering them, or selling new crop futures directly through a commodity broker or market advisor that has brokerage services. General guidelines are to have 30 to 40 percent of anticipated new crop bushels priced by the end of May.

Another good strategy this year is to establish both a downside price protection level and an upside price. For example, on April 11 with November futures at $12.62, one could establish a floor futures price at $12.40 and an upside ceiling of $14.00 at a premium costs of just $.34 per bushel. That gives protection if futures drop just $.22 per bushel, but provides added gains of up to $1.38 if futures prices rise to $14 or higher. Be sure to work closely with your elevator manager or broker in understanding these minimum/maximum price alternatives and their total costs.

Overall, the tightest crop year for soybeans was probably the 2007 crop, with some increase in world supplies as we move on to the 2008 crop this fall. However, as we all know, weather threats can send prices back toward the March highs. History tells us that harmful weather does not occur in most years. Since 1975, soybean yields have been above trend 58 percent of the time, and have been 5 percent or more below trend only 21 percent of the time. Overall, this means that the historic odds tend to imply favorable weather, thus some forward contracting in the spring tends to have beneficial results over time.


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.
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Chris Hurt
April-12-08
Purdue University