February 14, 2005
NEW LIFE FOR SOYBEAN PRICES
Soybean prices were under pressure in early
February, but increased sharply last week. The higher prices
came in spite of USDA projections for even larger U.S. and
world stocks at the end of the current marketing year.
March 2005 soybean futures traded under $5.00 on February
4, but closed at $5.2575 on February 11. The average spot
cash bid in central Illinois increased from $4.97 to $5.24
as the basis improved slightly. On February 9, the USDA released
its monthly projection of U.S. and world supply and consumption
of soybeans, as well as other commodities. For soybeans, the
changes from January included a 5 million bushel reduction
in the projection of the size of the domestic crush during
the current marketing year and an equal increase in the projection
of year ending stocks. Even with a smaller crush, the projection
of U.S. soybean oil production increased by 10 million pounds,
reflecting the relatively high oil content of the 2004 crop.
The projection of the marketing year average price of soybean
oil was reduced by $.01 per pound. In addition, the projection
of domestic meal consumption was reduced by 200,000 tons.
The smaller projection of meal use in the domestic market
is the reason fewer soybeans will need to be crushed.
For South America, the USDA reduced the projection of the
current Brazilian crop by 55 million bushels (2.3 percent).
Production forecasts also declined by 6 million bushels for
Uruguay and 18 million bushels for India. However, the projection
of South American soybean consumption was reduced by 75 million
bushels and the projection of world soybean consumption during
the current marketing year was reduced by almost 110 million
bushels. As a result, the projection of year ending world
stocks increased by 20 million bushels, to a record 2.254
billion bushels, or 30 percent of projected use during the
current marketing year.
So why the increase in price of soybeans in the face of such
large U.S. and world supplies? The answer seems to be that
the large speculative traders decided to reduce their net
short position in the futures market. But, that answer begs
the question of why those traders wanted to give up some of
those short positions. Fundamentally, there appears to be
three reasons. First is the continuation of strong Chinese
demand for U.S. soybeans. Second, the reduction in the Brazilian
production forecast caused traders to take a fresh look at
south American crop and weather conditions. Third is prospects
for a smaller soybean crop in the U.S. in 2005.
As of February 3, the USDA reported total U.S. soybean export
commitments for the current marketing year at 870 million
bushels, 40 million more than on the same date last year.
For the year, the USDA currently projects a 125 million bushels
increase in exports from those of last year. Given the collapse
in exports during the last half of the 2003-04 marketing year
(due to limited supplies) the projected large year-over-year
increase should be reached, or perhaps exceeded. Total Chinese
demand and China's decision about how many South American
soybeans to purchase will be important. To date, China accounts
for 42 percent of the U.S. export business, compared to 36
percent at this time last year.
As for South American production, market participants now
seem to believe that the crop has suffered more weather damage
than previously indicated. The concern is that the crop will
even fall short of the revised USDA projection. At this juncture,
there is no talk of a repeat of the 2004 experience when early
season forecasts of a large increase in South American production
gave way to a smaller crop than harvested in 2003.
In the case of the 2005 U.S. crop, there is a general expectation
that planted acreage will decline for a variety of reasons,
including the threat of soybean rust. In addition, some experts
are reporting the potential for a problem with soybean aphids
in 2005. Some climatologists are also suggesting a higher
than average probability of drought conditions in some areas
in 2005. These factors all contribute to yield uncertainty
for the year ahead.
For now, the uncertainty surrounding South American crop
size and U.S. production potential is apparently enough to
offset the impact of current large supplies. Additionally,
U.S. producers reportedly continue to be reluctant sellers,
keeping basis levels strong. Soybean prices will likely become
more volatile over the next several weeks as South American
production prospects unfold. The USDA will release the Prospective
Plantings report on March 31. Further price rallies may offer
producers an opportunity to price additional quantifies of
both old and new crop soybeans at levels well above the loan
rate. Due to the increased uncertainty about the size of the
2005 U.S. crop, producers may want to consider the use of
options in pricing the new crop. A poor crop could push prices
higher than anticipated at this juncture, while a large corp
could produce the train wreck that has been avoided so far.
Issued by Darrel Good
University of Illinois