August 6, 2001
SOYBEAN PRICES TO REMAIN VOLATILE
August is generally considered one
of the most critical months for determining U.S. soybean yields.
The USDA's final yield and production estimates have often deviated
from the August projection, based on weather conditions in August
and early September. Over the past 22 years, the final yield estimate
has been below the August forecast 11 times, above 9 times, and
about unchanged twice. The final estimate has been below the August
forecast by as much as 3.5 bushels (1983) and above the August
forecast by as much as 3.8 bushels (1994). The final estimate
was below the August forecast in each of the past four years,
in five of the past six years, and in six of the past eight years.
The final production estimate was below the August figure in 12
of the past 22 years and five of the past eight years. As a result
of the recent history of declining yield estimates after August,
there may be some tendency for the trade to fade the August projection
this year, particularly since weather conditions in late July
and early August were spotty.
Regardless of crop size, the market
continues to expect strong demand for soybeans during the 2001-02
marketing year. That expectation is based on signals that China
will continue to buy large quantities of soybeans, that soybean
meal exports to the European Union will continue to be supported
by restrictions on meat and bone meal feeding, and that domestic
soybean meal demand will be supported by a profitable livestock
industry. In addition, there is optimism about soybean oil demand
for the first time in about two years. Large supplies of other
vegetable oils, particularly palm oil, have resulted in relatively
small exports of U.S. soybean oil over the past two years. As
a result of large domestic inventories, soybean oil prices declined
to the lowest level in 28 years. Prices bottomed in February 2001,
with an average price at Decatur, Illinois of about 12.4 cents
per pound. On a daily basis, the price was as low as 11.8 cents.
Recent optimism about soybean oil demand is driven by continued
growth in world vegetable oil consumption and only a small increase
in production of competing oils, particularly sunflower, rapeseed,
and palm oil. Soybean oil prices moved to an average of 16.5 cents
in July 2001 and traded to a daily high of about 18 cents.
The market tends to equate consumption
with demand. The recent high levels of soybean consumption have
likely been driven by a combination of strong demand (increasing
population and economic growth) and low prices. It is not known
which component has been the largest contributor to increased
consumption. If demand truly is increasing, consumption will likely
remain high even if prices increase. On the other hand, if the
increase in use has been mostly a response to low prices, then
consumption would be expected to decline if prices increase, even
if supplies are adequate.Beyond the size of the U.S. crop and
world demand considerations, the market will also be influenced
by 2002 soybean production prospects in South America. In its
July report, the USDA projected a 3.2 percent increase in soybean
plantings in Brazil, a 1 percent increase in Argentina, and a
4 percent increase in Paraguay. The projected increase for the
three countries averaged 2.4 percent. Combined acreage in those
three countries increased by 39 percent in the five previous years.
Percentagewise, the largest increase was in Argentina, where acreage
increased by 69 percent in the past five years.
Recently, projections from a number
of sources have been for much larger increases in soybean plantings
in Brazil this year. Projections have been in the range of 9 to
10 percent. The large increase is expected to be generated by
a combination of somewhat higher soybean prices, continued devaluation
of the Brazilian currency, and extremely low domestic corn prices.
Average yields were well above average in Brazil, Argentina, and
Paraguay in 2001. More normal yields in 2002 would moderate the
impact of acreage increases, but a fourth consecutive record crop
may be forthcoming.
Last week's improvement in U.S.
crop ratings, along with precipitation in some of the dry growing
areas, reduced the market's concern about crop damage. Private
estimates of potential crop size are still in a wide range, but
a "decent" sized crop is now expected. However, soybean
prices will likely remain volatile through the remainder of the
growing season. Renewed concerns about crop size may yet emerge.
For the time being, it does not appear that cash prices will move
above the loan level. Harvest time pricing decisions, including
the use of the marketing loan program, will be dictated by the
level of prices in relation to the loan price and the carry in
the soybean price structure. If cash prices remain well below
the loan rate and the carry is non-existent, the incentive will
be to sell the crop and establish the loan deficiency payment
at harvest and hold ownership, if desired, with futures or options,
or with futures or options-based cash contracts.
Issued by Darrel
University of Illinois