Soybeans Prices: Hope for Recovery

October-10-08

What times we live in! Please read this month’s corn outlook for a discussion of how the financial crisis is impacting corn as well as all agricultural commodity prices. Just as for corn, your grain prices, at least for today, are more impact by the events on Wall Street than LaSalle Street (home of the Chicago Board of Trade).

In the October supply and demand estimates, the USDA did an unusual thing. They revised the size of the 2007 crop upward (that’s last year’s crop). Those higher numbers increased 2007/08 ending stocks to 205 million bushels from 140 million estimated last month.

In another surprise, the planted and harvested acres for 2008 were increased by 2.2 million acres, presumably from new information from FSA and or crop insurance records. Thus, even though the yields were reduced from 40 to 39.5 bushels per acre, the increased acreage meant that estimated production rose about 50 million bushels which was about 60 million more than anticipated.

Modest changes were made to usage. Ending stocks for the 2008/09 marketing year were raised by 85 million bushels to 220 million. This represents a 27 day supply which is slightly higher than the 25 day supply for 2007/08 crop year. Thus, U.S. stocks are expected to increase somewhat, and world stocks moved toward higher levels as well. This takes some of the pressure off of tight world stocks and makes shortage issues modestly less worrisome.

The keys to price direction will be determined by the unfolding financial crisis and its impact on U.S. and world demand as outlined in the corn outlook this month. USDA suggests a marketing year price in a range from $9.60 to $11.10, or $10.35 at the mean. Assuming that a portion of this price level was a result of forward selling at higher prices, this would suggest an average price of about $10 a bushel for the rest of the marketing year. At the close today- October 10, 2008- the futures market prices for the rest of the marketing year are reflecting closer to $8.75 per bushel cash prices, far below the USDA estimates. What’s the difference? The USDA estimate has not yet taken into consideration the reductions in demand that will likely occur if world incomes weaken.

Another way to interpret the USDA price estimate is that soybean prices will recover by $1.25 per bushel (on average) if the financial crisis has only a minor impact on world income growth.

Returns to storage appear to be favorable with anticipation for about a 90 cent per bushel increase in prices into next spring. Subtracting 6% interest still provides an anticipated return of around 50 cents per bushel from on-farm storage above interest costs. As with corn, current carry in the market is about equal to the commercial storage costs. Thus, those storing commercially are largely speculating that prices will rise, and of course taking the risk that they will continue to decline.

The South American crop will be increasingly important to prices in the December to March time period. World stocks remain fairly tight, thus the world needs favorable yields from South America. Weather patterns that put normal yields in jeopardy will mean higher soybean prices.

Most will want to store soybeans and anticipate (hope for) improving prices. If the current financial crisis can be put behind us, then the possibility exist for a return to $10 to $11 cash bean prices. Also weather scares in South America provide another opportunity for price increases. However, there is also the danger that world income growth will be more heavily damaged, that crude oil prices continue to erode, and that South America has record soybean production.

Should you still plant wheat this fall and double crop beans for 2009 harvest? The economics right now says NO. The reason is because returns to wheat look dismal at this point, and small double crop bean yields cannot make-up for the losses on wheat. Single crop soybeans and corn both beat wheat-double-crop beans. But, be sure to run your own budgets and add any values for straw.

Also, 2009 corn prices in recent weeks have fallen relatively more than soybeans. This has made 2009 corn and soybeans look equally attractive from a return per acre standpoint. However, there is far to go before final acreage is determined through this winter and early next spring as both crop prices as well as input prices are expected to be dynamic.

Chris Hurt
October-10-08
Purdue University