Will Old Crop Soybeans Make $14?

May-26-09

Old crop soybean prices have lit up the sky like a rocket. July soybean futures as an example had a low this year on March 2nd at $8.41 per bushel and reached $11.895 on May 20, an increase of nealy$3.50. One word pretty much summarizes why, and that word is ………………….Argentina. The anticipated size of the crop there dropped by 360 million bushels since early March due to drought. This means the world has continued buying U.S. origin beans more aggressively this spring.

The second key word for old crop soybeans is….China. They continue to be the big buyer representing 55% of all bean sales from the U.S. this marketing year. Chinese purchases from the U.S. so far this year are up 41% versus the same period one year ago. So far this spring, their weekly purchases have remained robust. How long they will keep buying at this pace is unknown, but is probably the single most important factor in determining when old crop soybean prices will peak.

USDA’s May 2009 estimate is for bean exports this year to be 1.24 billion bushels. At the current sales pace, exports could rise by another 60 to 80 million bushels. Estimates for ending stocks on August 31 are already down to 130 million bushels representing only a 16 day supply. If exports end up being larger, as now looks likely, ending stocks could drop further, maybe under 100 million bushels or a 12 day supply. The tightest ending number is 15 days at the end of the 1964/65 marketing year.

Normally soybean export sales for old crop begin to slow sharply in April as the world turns to South American origins. This year however, sales in April and the first-half of May have been 203% of the average sales for the same time period during the last 10 years. We are now at a point where weekly sales must begin to drop back to “normal” levels, or exports will exceed the current USDA estimates. So, the key for old crop beans will continue to be export sales, particularly to China. Sales reports are out on Thursday mornings before the futures market opens.

Soybean meal prices are leading the upward bean price movement. Since April 24th, July soybean meal futures have been up 22%, while soybean oil futures have been up only 3%, with soybeans up 15%. Soybean meal export sales since April have been up 40% this year compared to the same period last year, an indication that the world has had to return to the U.S. for more meal due to the reduced production in South America.

So, where’s the price top? That is impossible to say, but it is certainly lower than last year’s $16.60 peak price for July 2008 futures on July 3. A host of reasons tell us it is not as high as last year even though U.S. inventories are likely to be much tighter than last year. The exchange rate of the U.S. dollar is higher this year by about 10% to 12%, so foreign currencies tend to be weaker by a similar amount (although this depends on the currency). Livestock numbers are down this year and less consumption of soybean meal is required. World soybean oil usage is also weak, expected to be down 6% from last year. And of course, the world economic slowdown creates an environment where high prices begin to reduce usage more quickly than was the case last year.

The next resistance points on July 2009 soybean futures are at $12.50 and then $14.00 per bushel. Those would seem logical next steps for this remarkable soybean rally, in the midst of a major recession. Like last year, the market high will likely be achieved by July 4th. By that time, if China continues to buy aggressively, prices will have to rally to force further cutbacks among other end users (greater rationing).

Movement of old crop futures to higher levels will also encourage higher new crop prices. However, higher new crop prices will result in more acres being shifted this spring from corn (and other crops) to soybeans. It will also stimulate more double crop bean acres behind wheat. So, old crop price strength will not be nearly as robust in the new crop. Since April 24th as an example, July futures have risen by $3.50 per bushel and November 2009 futures by only $1.09, or 31% of the old crop increase. Over the next month, new crop beans may increase only 15% to 25% of the increase in July 2009 futures. Thus, if July futures do move to $14, this might only increase November-new crop futures by 40 cents to 60 cents per bushel and approach $11 per bushel.

Once the old crop soybean prices peak, then the price of July futures will probably fall more rapidly than the November-new crop futures. This is the reason that some may want to consider pricing new crop futures by selling old crop futures months like the July, August, or September. This is an old crop/new crop spread which is full of risks. Those risks can be lowered sharply by selling the August or September futures rather than the July futures. Generally by late July or early August the old crop shortage situation will be resolved and August and September prices may decline more than the November futures. These spreads are very dangerous so should only be considered by experienced farm marketers or with a clear understanding of their risks from a trusted market advisor.

Chris Hurt
May-26-09
Purdue University