Soybeans Stocks Dwindle this Summer

June-12-08

Strong U.S. export sales continue to tighten old crop soybean inventories. By the end of August, USDA now indicates that endings stocks will reach just 125 million bushels or a mere 15 days of supply. A 15 day supply implies beans would be nearly depleted from the pipeline by mid-September. This will probably mean some strong price premiums for first-half September soybeans delivery.

Soybeans are getting hard to find and basis levels have reflected the shortage that is developing this summer. Basis levels moved from about $.50 to $.60 under futures in late winter to about $.15 to $.25 under currently. Export commitments are running at a higher level than indicate by the USDA estimate of 1.11 billion bushels. That level currently is about 30 million bushels higher. Given the limited ending stocks of 125 million bushels, any additional exports above the 1.11 billion would put severe pressure on already very limited supplies.

For the 2008/09 marketing year, USDA sees ending stocks only increasing modestly to 175 million bushels as of August 2009, or 21 days supply. This includes a 20% expansion of projected production this summer.

The wet weather and delayed planting adds uncertainty to the size of the final crop. Soybean acreage was estimated at 74.8 million acres, but I had felt we would shift three million of those to corn. Given the delays in corn planting, that shift probably did not occur. The bean planting is very late-about 30% of the nation’s beans were planted by May 20th. Flooding and ponding in Iowa, Wisconsin, Illinois, and Indiana have added to the problems as well. Winter wheat is about one week late in maturity which will delay seeding double-crop soybeans. This all means that production potential has been lowered.

How much reduction in production might have already occurred? Of course no one knows, but in the flood year of 1993, soybean yields dropped by 9% and harvested acres declined by 3.1 million acres due to flooding and ultimate abandonment. This year, a reduction of two million acres and 5% on yield would reduce production by 230 million bushels, a number that is bigger than the USDA’s estimated ending stocks level. This highlights the critical shortage of soybeans. If production were to drop this much in the U.S., the South American crop would have to expand more than currently expected to help meet world demand.

It’s June and we are in a weather market already. The forecast for the next week remains cool/wet for the soaked Western Corn Belt. The two week out forecast remains cool, but dryer. After June, the National Weather Service does not see any reason to call precipitation or temperatures as having a tendency toward higher or lower levels for the remainder of the summer.

July futures reached $15.96 on March 3, 2008 and a return to that level is now the objective for old-crop futures. New-crop November futures prices established new record contract highs on June 11 at $15.11. Movement toward $16 would be the short-term upside objective. It has been a wild ride as November futures have had a trading range of $4.50 per bushel from lows April 1 through June 11. Generally, movement to new highs signals further upward movements, but much will depend on weather over the next several days and weeks.

Clearly these are record high new-crop pricing opportunities. Those that have a soybean crop that is off to a reasonable start this year will have the opportunity to generate revenues that are beyond imagination. Adding to 2008 new crop sales is to be encouraged. New-crop basis bids are still very wide in relationship to the shortages of soybeans that will be anticipated over the next year. In addition, the demand for storage will be limited this fall with a much smaller corn crop. This also means there will not be as much pressure to sell beans (or corn) at harvest. Current new-crop bids are generally $.80 to $1.00 per bushel under November futures. Those bids could be $.35 to $.50 under at harvest. Those that want to establish the new-crop futures but not the basis can use, hedge-to-arrive contracts at their local elevator, or sell futures themselves. Those who feel the basis will improve sharply, as I do, should not use forward cash contracts because that establishes both the futures and the basis.

Chris Hurt
June-12-08
Purdue University