July 19, 2004
SOYBEAN PRICES COLLAPSE: WHAT NEXT?
August 2004 soybean futures reached a high
of $10.26 on March 24, 2004 and traded to a low of $7.05 on
July 16. While some have termed the decline as unprecedented,
it is reminiscent of some past price behavior.
July 1977 soybean futures reached a contract high of $10.64
in May 1977 and traded below $6.00 per bushel in July 1977,
declining nearly $4.00 in less than a month. July 1988 futures
reached a high of $10.995 in late June 1988 and declined to
$8.20 at maturity, dropping $2.00 in the last week of trading.
The most dramatic decline was in 1973, when the July contract
reached a high of $12.90 in early June 1973 and traded below
$6.50 in early July. However, the contract rebounded to $10.25
The current price decline has also been associated with a
free fall in the basis. The central Illinois cash bid was
$1.34 above August futures on July 8 and $.235 above that
contract on July 16. Again, the collapse in the basis is not
unprecedented. The Chicago cash bid was $1.14 above August
futures in early June 1973 and was $1.35 below that contract
in late July. Such a collapse did not occur in the summer
of 1977. The difference that year was that July futures did
not attain the large premium to the August contract that occurred
in both 1973 and 2004. Such large inverses appear to be a
What now? Will prices remain low and continue to decline
as has typically been the case with the demise of bull markets,
or will there be a final gasp higher as in 1973? The answer
may be determined primarily by two factors. The first is how
well processors and end users have prepaid for the extremely
tight inventory situation. The extreme tightness in U.S. stocks
has been advertised since December 2003 and the shortfall
in South American production was advertised early in the spring.
If end users prepared for this scenario, one would expect
that their inventories of product, particularly soybean meal,
are larger than normal. In addition, arrangements for imports
of soybean meal might have been made. The latter does not
seem to be the case, however, as the USDA lowered the projection
of marketing year meal imports by 150,000 tons in last week's
report of supply and demand prospects. The projection of soybean
oil imports was increased by 50 million pounds.
The second important fundamental factors is the timing of
the availability of new crop soybeans. The crops in Arkansas,
Louisiana, and Mississippi appear to be maturing earlier than
normal, but there is some disagreement on how early harvest
will occur. Those early harvested soybeans may be needed in
the domestic processing market, so logistics could be an issue
Beyond the next 4 to 6 weeks, the size of the U.S. crop will
be the most important price factor. After that, Chinese demand
and South American crop prospects become important. The market
will continue to follow the USDA's weekly report of crop conditions
to gauge yield potential, but considerable uncertainty about
corp size may persist as late as early September. Crop condition
rating as of June 11, slowed 68 percent of the crop in good
or excellent condition, with the highest ratings in Kansas,
Kentucky, Mississippi, and Tennessee. Ratings were also above
the national average in Illinois and Iowa. Based on historical
relationships, current ratings point to the potential for
a high average yield, but such potential has not always materialized.
The most recent instance, of course, was last year.
In spite of a recent slow down in soybean imports by China,
the USDA expects an 8 percent increase in soybean consumption
and a sharp rebound in imports by China during the year ahead.
Chinese imports totaled 790 million bushels in 2002-03, are
projected at 660 million for the current year, and at 880
million in 2004-05.
The USDA projects a 7 percent increase in South American
soybean area for the coming year. Acreage is expected to expand
by 10 percent in Brazil. A return to more normal yields in
2005 would result in a large increase in South American production,
projected at 21 percent by the USDA.
The soybean market appears to be making the transition from
an environment of reduced supply and high prices to a one
of abundance, and perhaps surplus, and low prices. If the
large crops do materialize, prices will likely decline even
further, but uncertainty abounds. The lessons learned this
year include the merits of spreading sales throughout the
marketing year and the merits of using options in making pricing
Issued by Darrel Good
University of Illinois