Frost/Freeze No Big Deal: Take Advantage of the Rally

October-12-09

USDA increased last year’s production and dropped residual use such that the ending stocks from the 2008/09 marketing year were increased 28 million bushels to 138 million. The larger carry in to the 2009/10 crop enabled a higher usage for exports, but the bottom line was only a 10 million bushel increase in 2009/10 ending stocks from 220 to 230 million bushels. Overall, not much change after tweaking a lot of numbers.

The big issue is how much frost/freeze/snow/flooding damage has occurred to this year’s production. My estimates are that soybean maturity may have been far enough along to minimize the yield losses from season ending temperatures during the October 9 to October 12 period for major northern growing areas. The early assessments of yield losses will be difficult with wide ranges on the magnitude.

My numbers are based on the assumption that beans that had begun to drop leaves will have little yield losses from frosts/freezing temperatures. Using the state data for percentage of acres that had at least reached the “dropping leaves” as reported by USDA on October 4, and estimating the additional percentage that would have reached this stage before the frost, I am estimating that Illinois had 34% of their bean acres that were vulnerable, Wisconsin had 23%, and Indiana and Michigan had 18%. Noteworthy is the fact that states in the north and western Corn Belt had very small percentages of their soybean acres that were not dropping leaves yet. My estimates of the percent of vulnerable acres by state are: North Dakota 3%; South Dakota 1%; Nebraska 5%; Minnesota 1%, and Iowa 6%.

The total estimated loss across the Midwest is only 15 million bushels. It is probably within reason to broaden that number out to 10 million to 30 million bushels of loss in discussing the potential impacts on market prices.
Exports will be the usage category that is most difficult to estimate this marketing year. The recovery of the world economy will be positive to higher world trade, but this may be more than offset by over 1.3 billion bushels of added world production primarily in South America.

So far in the first five weeks of the marketing year, U.S. export commitments (already shipped plus sales that have not been shipped) are at record high levels of 718 million bushels compared with 406 million at this time a year ago. China is the big early buyer having committed to 436 million bushels for this marketing year compared to purchases totaling 687 million bushels for the entire 2008/09 marketing year. Most other major buyers with the exception of Taiwan have been slower to commit to soybeans this year compared to last year at this time.

Have the aggressive purchases of China so far caused USDA to overestimate our soybean exports? Given the potential for 1.3 billion more bushel of world production, it may be difficult for U.S. exports to stretch to a record 1.305 billion bushels. That number would represent over 45% of world exports and about the same percentage as in 2008/09 when South American yields were so poor. It may be more realistic for the U.S. to obtain about 40% to 42% of world exports and that would be closer to 1.125 to 1.175 billion bushels (with current USDA world export estimates). That would mean exports could be overestimated by 130 to 180 million bushels- a large number.

The final answer will depend on how large the South American crops are and how quickly buyers will shift purchases to South American origins. Also keep in mind that the current rally in soybeans will stimulate more Southern Hemisphere acres to be planted and that is bearish to soybean prices after February 2010.

What about prices? My anticipation is that the concerns for reduced yields in the U.S. due to frost/freezing/snow are too large. I also anticipate that U.S. exports will have difficulty living up to the lofty levels currently in the balance sheets. If either of these becomes reality, then $10 soybean futures as seen on October 12 are too high. This is not to say that futures could go higher to say $10.50, but prices at $10 and higher might not be sustainable. Also keep in mind that this assumes that the South American yields are normal. A reduced crop there could take prices back to $12 as we saw in June of 2009.

Great pricing opportunities on beans will encourage some more selling out of the field. For on-farm storage, the expected increase in price for two to three months will just about cover the costs of interest. This would provide a period to speculate on higher basis and futures.

Prospects for earning a positive return to commercial storage are relatively low, especially compared to other alternatives. Instead of commercial storage, consider one of three alternatives: 1. sell cash beans now and replace with futures; 2. sell cash beans now and replace with call options; or 3. use a basis contract to price the basis now and ship beans to the elevator at harvest. The basis contract avoids storage costs, but allows one to speculate on the futures price. Most may want to price the basis relative to next July futures. At this writing, a harvest basis of 30 cents under the November 2009 futures is equal to about 24 cents under the July 2010 futures contract.

For some, selling more soybeans in 2009 may increase income tax liability. Those individuals should still consider selling in 2009, but on a contract that stipulates that payment for those soybeans cannot be made before January 2, 2010. If the seller cannot receive payment until 2010, this shifts the revenue into 2010 even though the beans are sold and delivered in 2009. However, check with both the grain elevator manager and your tax advisor on how the IRS will treat this income for your taxes.

Chris Hurt
October-12-09
Purdue University