March 22, 2004
SOYBEAN PRICES: HOW HIGH? AND THEN, HOW LOW?
Soybean prices continue to push
to higher levels, driven by almost daily declines in the expected
size of the current South American soybean harvest. Deteriorating
crop conditions there provide significant price support when coupled
with the need to sharply reduce the pace of domestic processing
of U.S. soybeans.
The pace of domestic processing of soybeans during the first half
of the 2003-04 marketing year was about equal to that of last year.
Smaller supplies imply that the pace of processing will have to
slow sharply during the last half of the marketing year. In many
respects, 2003-04 has been very similar to the 1976-77 marketing
year. Both years were characterized by a small harvest that was
only recognized late in the growing season and a failure of consumption
to make early adjustments to the short supply. Prices were too low
early in the 1976-77 marketing year and moved sharply higher in
the spring of 1977 in order to force reductions in domestic use.
The fundamental difference this year compared to 1977 was the expectation
of large South American supplies that could provide soybean meal
and oil to the U.S. market if needed. The smaller than expected
crop there is still large enough to meet world needs in the short-run,
including imports by the U.S., but means that the U.S. needs to
produce a large soybean crop in 2004.
In contrast to the pace of domestic crush, U.S. exports have declined
in the face of smaller supplies. The USDA projects marketing year
exports at 890 million bushels, 14.8 percent below the exports of
a year ago. Through March 18, 2004 (28 weeks into the marketing
year) the USDA's export inspection report indicated that cumulative
shipments were 11.5 percent smaller than during the same period
last year. As of March 11, outstanding export sales of soybeans
for the current marketing year stood at 93 million bushels, 31 million
less than outstanding sales on the same date last year. Perhaps
exports will be less than projected, allowing the domestic crush
to be a little larger. Outstanding sales of U.S. soybeans for delivery
during the 2004-05 marketing year are relatively large, also totaling
93 million bushels on March 11. Almost 80 percent of those sales
are to China.
The current strong rally in soybean futures prices has resulted
in a scramble to forecast the top in the market. Targets include
the April 1977 high in May futures of $10.765; the June 1988 high
in July futures of $10.99; and the all time high of $12.90 for July
1973 futures in June 1973. Still, others suggest the strong likelihood
of new all time highs similar in magnitude to those which occurred
in corn and wheat in the spring of 1996. For new crop November futures,
targets include the highs reached over the past 30 years, ranging
from $8.02 last year to the all time high of $10.46 reached in June
1988. There are a cluster of highs ranging from $9.00 to $9.685.
Perhaps as important as when and at what level the high price occurs,
is the question of the pattern of price decline following the high.
In almost all instances of extreme price highs in modern history
(post- 1972) prices have declined very rapidly in a very short period
of time. July 1977 futures peaked at $10.64 in late April 1977 and
traded below $6.00 in mid-July. July 1988 futures reached the $10.99
high in mid-June and expired at $8.29. Similarly, November 1988
futures reached a high of $10.46 in mid-June and expired at $7.28.
Finally, July 1973 futures reached a $12.90 high in early June,
traded to $6.30 in early July, and expired at $11.87 (bid). History
does not provide a forecast for the current situation, but illustrates
that prices could become even more volatile before reaching a high
and could decline sharply in a relatively short period of time.
Fundamentally, the actual size of the current South American harvest
and prospects for the 2004 U.S. crop will be very important factors
over the next several months. The pace of Chinese purchases and
the level of soybean product imports into the U.S. will also be
watched closely. Perhaps the price decline will be more orderly
and gradual over a longer period of time as the market makes the
transition from small supplies to more abundant supplies in 2004
and 2005. In any case, the current high price environment provides
a challenge for producers in timing the pricing of remaining old
crop supplies as well as expected 2004 production. That's the bad
news. The good news is that high prices provide very profitable
Issued by Darrel Good
University of Illinois