Soybeans: How Much Downside Price Potential?

July-16-08

How do you get from $16 beans to $13? Answer: day-by-day. Consider the movement up. November soybean futures traded near $13 on May 9th and by July 1st were above $16, that was a mere 36 trading days. Soybean prices have been much slower to fade recently as compared to corn and wheat. Corn and wheat futures at this writing have dropped 17% from their summer highs, while November soybeans have fallen just 8% from a high of $16.35 on July 3. A 17% reduction in November soybean futures would put them down to about $13.50, another $1.50 per bushel lower.

The reason for less soybean price weakness lies in the very tight old crop inventories that are anticipated this summer. In addition, late planted soybeans will tend to make the harvest somewhat later than normal in September when old crop soybeans are exhausted. USDA is using an ending stocks level of just 125 million bushels at the end of August. That is just a 15 day supply, and is a lower stocks-to-use ratio than in the early 1970s.

While USDA just raised exports for the 2007/08 marketing year to 1.145 billion bushels, the rate of foreign purchases has slowed down sharply in recent weeks. For the period from early June, when the flooding began, to the most recent data, export purchases have been down 39% from the same period a year ago. Some of this slowdown is likely related to Argentine farmers reentering the export market in June.

Domestic crush may slow this summer as well, particularly with some reductions in the U.S. hog breeding herd that is underway and with fewer calves moving into feedlots. The potential late-summer opening of CRP land may keep some additional calves out of the feedlot in hopes of using these forages for cheaper gain. Finally, wheat feeding is increasing this summer as wheat prices in the Eastern Corn Belt are often less than corn. Wheat has higher protein content than corn and will allow some substitution for soybean meal.

Acreage remains in doubt after June flooding. USDA’s evaluation released in the June 30th Acreage report was that soybean planted acres are 74.5 million with an estimated 72.1 million expected to be harvested. It remains unclear how many acres finally got planted to soybeans as some intended corn acres were shifted to soybeans and final double-crop soybean acres. USDA’s survey indicated that 9% of the soybean acres are double-cropped this year, the highest amount since 1996 when soybean prices were high for that time period. This means about 6.7 million of the soybean acres are double-crop. This is 2.9 million more double-crop acres than in 2006.

The soybean crop was extremely late planted this spring/summer. This may have some impact toward reducing national yields, but national yields have not been statistically related to planting date in the past. Thus, I have not lowered base yield estimates due to late planting this year. Soybean yields tend to be determined by weather in late July-August-and early-September.

Weekly crop conditions from USDA have shown some improvement in the appearance of the national soybean crop since mid-June, although still somewhat below an average crop. My estimate of yield for this week based on USDA’s Crop Progress report is 41.7 bushels very close to the USDA June estimate at 41.6. This would provide production near 3.0 billion bushels. That will not be large enough to build stocks very much in the 2008/09 marketing year when USDA estimates ending stocks in August 2009 would represent a 17 day supply.

This means prices will remain high, but the questions is how high? USDA has estimated a range for the price received by U.S. farmers of $12 to $13.50 per bushel. Keep in mind that current cash bids for harvest delivery crop are around $14.50 (depending on the day). Do the math—this is $1.00 to as much as $2.50 above the USDA’s best guess for the average price which would have to be reduced by storage costs. My view is that there is still a $1.00 to $1.50 per bushel risk premium in the market. This means the market is currently willing to pay producers an extra $1.00 to $1.50 per bushel to sell futures now with all the yield uncertainty rather than wait until harvest when yields become know. This encourages adding to new-crop sales positions.

Basis bids are awful for new crop at $.90 to $1.10 under November futures. Last year they were $.50 to $.70 at harvest. Given that old crop basis will remain very strong and that there will be less demand for storage this fall due to a smaller corn crop and smaller soybean inventories, soybean basis may be somewhat better than last year. Those that forward contract should thus consider taking futures or options positions themselves with their market advisor. This means they have not priced the basis which could improve by as much as 20 to 40 cents per bushel.

Those still holding old crop soybeans need to be cautious about holding too long into August as there is a huge price drop expected as new crop beans become available. Currently old crop soybeans are $1.00 to $1.40 higher than new crop bids. This very large inverse also means that large premium bids may exist for any beans that can get be delivered by mid-September. A movement back to $16 on September futures seems to be a possibility and a wonderful sales opportunity on old crop.

Those that have early harvest should consider selling these potentially large premiums. Also, most should not deliver early shipment beans against new crop contracts because they would forego the early shipment premium. See if the elevator manger will provide an additional price premium on the new-crop contracts for the early shipment.

Chris Hurt
July-16-08
Purdue University