Soybeans May Have Higher Odds of Price Increases!

November-11-08

The soybean market has outperformed corn during the recent price collapse. Since grain prices went over the cliff after September 26th, corn prices have fallen by 31%, but soybean prices by a more modest 22%. Soybeans just do not have as many negative fundamentals as corn. Several negative factors are common to both including the impacts of the financial crisis and the increasing value of the U.S. dollar. But there are two important differences as well. First, soybean export purchases are on a strong pace, and soybeans do not have as much exposure to the weak energy sector as corn.

In the November 10th updates from USDA, production was lowered by 17 million bushels and domestic crush was reduced a similar amount reflecting smaller demand for domestic soybean meal as animal numbers decline. These small changes left endings stocks for August 2009 unchanged at 205 million bushels which represents about the same stocks-o-use ratio as the 2007 crop.

Exports are giving soybeans “star power”—at least compared to corn. USDA estimates that soybean exports for the 2008 crop will be down by 9% from last year’s high level. Currently export commitments are actually 15% greater than last year at this time. The rapid pace of purchases is of course led by our largest buyer, China who has purchased 24% more beans than this time last year (China purchased 41% of all U.S. soybean exports last year). Also, Taiwan and Korea are about 10% ahead of last year’s purchases. Mexico and Japan our second and third largest customers are about 30% behind on purchases. This seems to indicate that various countries have much different strategies for when to buy beans this year. If this export pace keeps up, USDA may increase export volumes by their December updates.

More positive news is that our big buyer-China, has a strong cash financial position with nearly $2 trillion of foreign exchange..that’s like cash buying power. Cash is king today and our big customer is in good shape(see liquidity trap in corn outlook). Also, the Japanese yen been appreciating relative to the U.S. dollar, making U.S. soybeans less expensive to Japan.

Declining energy prices are not as damaging to soybean prices since only 15% of 2008 crop soyoil will be used as biodiesel. This compares with 32% of the 2008 corn crop that will be used for ethanol.

Post-harvest price recovery is the normal tendency, but this year the financial crisis can still take soybean prices lower (see our corn outlook). Thinking along the lines of the historic post-harvest price increases might return January futures back near $10 with cash prices in the $9.50 to $9.75 range in Indiana. If the world economy can stabilize by next spring, July futures might recover to the $11.50 to $12 range. This is far from where the market is now, and is dependent upon a continued rapid export pace and on the world economy not being worse than is currently anticipated.

Soybeans may have more potential to move upward than corn. This may be helpful in deciding which crops to store. South American acreage and weather will also be potential price drivers this winter. USDA expects South American acreage and production to rise by 4%.

There is great uncertainty around price direction with no convincing indicators saying bean prices have bottomed yet. Expectations of major price recovery should be tempered, and each producer needs to evaluate their farm’s financial situation if prices were to drop even lower.

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
November-11-08
Purdue University