September 22, 2003
THREE QUESTIONS FOR THE SOYBEAN MARKET
November 2003 soybean futures traded to about $5.10 in late July as the market
reflected expectations of a record U.S. soybean crop near 3 billion bushels.
Since then, the price of that contract has increased sharply, reaching about
$6.48 in early trading on September 22. The price rally has been in response to
lower production expectations.
The September USDA Crop Production
report forecast the 2003 harvest at 2.643 billion bushels, the smallest since
1996. Early yield reports have generally been on the low side, creating
expectations of a lower production forecast in October. November futures have
established the highest contract high since the 1999 contract reached a high of
$6.80. With U.S. soybean supplies at the lowest level in seven years, the
market has become pretty dicey. Prices over the next few months will reflect
three important fundamental factors.
First, and of immediate importance,
is the actual size of the 2003 crop. Given the nature of the 2003 growing
season, it is not surprising that yields from early maturing varieties are low.
The question is how much did late August rains in the eastern and southern
growing areas benefit later maturing varieties? Opinions differ widely, but it
would not be surprising to see near normal yields from those varieties in
eastern growing areas. Many western and northern growing areas did not receive
as much late season rainfall, so that yield prospects there are lower for the
later maturing varieties. Only time will tell if the USDA’s September report
captured actual yield prospects. Historically, there has been no correlation
between production forecast changes in September and changes in October. On
average, since 1970, the crop forecast in September has differed from the
estimate in January following harvest by 4 percent. The “error” has ranged from
near zero to 9.5 percent.
The second fundamental factor is the rate of
consumption of the 2003 U.S. crop. If the crop is near 2.64 billion bushels,
and the minimum year-ending stocks level is about 5 percent of consumption, use
during the 2003-04 marketing year would be limited to about 2.654 billion
bushels. That would be about 170 million bushels less than consumed during the
2002-03 marketing year (after the 2002-03 consumption estimate is corrected for
the apparent underestimate of the size of the 2002 crop). The USDA has
projected a 60 million bushel reduction in the domestic crush and a 100 million
bushel reduction in U.S. soybean exports. The question is, when will the pace
of consumption begin to fall in line with available supplies?
exports during the first 2.5 weeks of the 2003-04 marketing year were about 4
million less than during the same period last year. However, unshipped sales as
of September 11 totaled 311 million bushels, compared to 228 million on the same
date last year. All major customers, except Mexico, have booked more soybeans
than at this time last year. The rapid pace of export sales to date magnifies
the significance of a smaller crop.
The third fundamental factor, very
much related to the second factor, is the potential size of the 2004 South
American soybean crop. The size of that crop will have an impact on the demand
for U.S. soybeans and soybean products. In its September report, the USDA
forecast an 8.7 percent increase in soybean area in Brazil, a 4.8 percent
increase in area in Argentina, and a 6.9 percent increase in Paraguay. Combined
area in those three countries is expected to increase by 7.1 percent. For the
past two years, soybean area in Brazil has expanded by 17.4 percent and 12.5
percent, respectively. Area in Argentina increased by 9.6 percent and 10.5
percent, respectively. The recent increase in soybean prices may encourage a
larger than forecast increase this year, as additional acreage is shifted from
other crops to soybeans. The question, then, is what will the average South
American soybean yield be in 2004? The average was record large in 2003, with
new records established in Brazil and Paraguay and the 1998 record equaled in
Argentina. The USDA has forecast a 1 percent decline in the average South
American yield in 2004. Production there is forecast at 3.57 billion bushels,
nearly 200 million bushels larger than the 2003 harvest. An increase of that
size would offset the smaller crop in the U.S.
uncertainty on both the supply and demand side of the U.S. soybean situation,
pricing decisions are difficult. Increasingly, the soybean market is
developing a “short-crop” pattern, with prices moving higher, basis
strengthening, and inverses in the futures market growing into the harvest
period. Historically, short crop years have produced some of the better pricing
opportunities near harvest time.
Issued by Darrel Good
University of Illinois