June 7, 2004
SOYBEANS AND CHINA
Soybean prices continue to be extremely
volatile. Last week alone, July 2004 futures had a $.75 trading
range and November 2004 futures traded in a range of $.65.
The volatile price behavior is being generated by a number
of factors, including U.S. weather and crop progress. After
an extremely fast start to the planting season, heavy rains
in some areas brought planting to a halt and resulted in areas
of ponding and flooding. Some replanting will be required
and some area may be lost for the year. Planting progress
is now behind the average pace in Wisconsin, Michigan, and
Ohio. The magnitude of the area to be replanted is still not
In general, the later planting of the last 25 percent of
the area may make it a little more difficult to reach the
40 bushel average yield projected by the USDA's World Agricultural
Outlook Board. However, history suggests that July and August
weather is still most important in determining soybean yields.
Adverse conditions this summer could compound the effects
of planting delays, while favorable conditions could more
than compensate for early problems and produce a trend yield.
Both outcomes have been experienced. Look for the debate about
acreage, crop conditions, and production potential to continue
to provide wide price swings. Price jitters associated with
uncertain production prospects are common, but may be magnified
this year because of late season production problems in the
U.S. in 2003 and in South America in 2004. World stocks are
a little tighter as a result of the shortfall in production.
Uncertainty about Chinese soybean demand has also contributed
to soybean price volatility and may continue to do so. China
bought large quantities of soybeans last fall as the shortfall
in U.S. production was recognized. The exact timing of their
purchases is difficult to track from USDA reports since some
sales are initially reported as sold to "unknown"
destinations. The USDA reports that 302 million bushels of
U.S. soybeans have been exported to China since September
1, 2003, nearly 9 percent more than during the same period
one year earlier. There are currently no outstanding U.S.
sales of old crop soybeans to China, which is typical at this
time of year.
It was assumed that China would continue to import South
American soybeans at a rapid pace into the fall of 2004. In
the past few weeks, however, China has rejected several shipments
of soybeans from Brazil on the basis of fungicide contamination.
Initially, there were rumors that the rejected Brazilian soybeans
would be replaced by purchases from the U.S. To date, no such
sales have been reported. Chinese feed-demand has been weakened
by the outbreak of bird-flu in January, resulting in declining
prices and falling soybean crush margins. Attempts by processors
to stabilize the price of soybean meal in China have not yet
been successful. The Chinese demand picture, both in the short
run and into next year, now includes a lot more uncertainty
than was the case just a few weeks ago.
The developments in China may have also impacted sales of
U.S. soybeans for delivery in the 2004-05 marketing year.
The USDA first reported such sales to China in late November
2003. By late January 2004, sales of new crop soybeans to
China reached abut 75 million bushels. It appeared that China
was buying U.S. soybeans early this year as the result of
waiting too long last year. However, no new sales of new crop
U.S. soybeans to China have been reported since late January.
Many insist that the current Chinese situation of weak demand,
low feed prices, poor crush margins and a glut of soybeans
is only temporary. The expectation is that growth in feed
demand will be back on track soon. Such a rebound in demand
will be critical for soybean prices during the year ahead.
A large U.S. harvest in 2004, along with increased acreage
and a return to trend yields in south America in 2005, would
result in an abundant world supply of soybeans by the spring
of 2005. That scenario is a long way from being accomplished,
but would likely result in a return to lower soybean prices
than currently reflected in the futures market. The market
remains strongly inverted, with prices for the 2005 crop $2.30
below the current cash price. Those deferred prices, however,
are much higher than prices experienced from late 1998 through
the first half of 2003. Periods of higher prices during the
summer of 2004 may offer opportunities to price a portion
of the 2005 crop.
Issued by Darrel Good
University of Illinois