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Good of IL: Soybeans -- What will South America do?
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7/26/2007 URBANA, Ill. -- In his July Grain Price Outlook, University of Illinois Extension Economist Darrel Good provides an extensive analysis of the soybean situation -- predicting extremely volatile prices as stocks decline and South America and other major factors remain question marks.
Summary
U.S. soybean stocks on June 1, 2007 were record large at 1.09 billion bushels, about 100 million more than the inventory of a year earlier. Year ending stocks are expected to total about 600 million bushels, 150 million larger than the inventory on hand at the beginning of the 2006-07 marketing year.
Producers reported planting only 64.1 million acres of soybeans in 2007, 11.4 million less than the record acreage of 2006. The 2007 harvest is now expected to be the second smallest in 8 years, at 2.66 billion bushels. That is nearly 530 million less than the record crop of 2006. Smaller production will result in a significant reduction in year ending stocks by September 1, 2008.
The average farm price of soybeans during the 2006-07 marketing year will likely be near $6.35, the second highest in eight years. Prices moved sharply higher during the year, however, as the market anticipated, and producers confirmed, a large drop in acreage. Prices were also supported by periods of concern about the condition of the 2007 crop, by the need to encourage expanded acreage of soybeans in South America, and by expanding biofuels production in Europe and the U.S. The average price, as well as the seasonal pattern of prices, during the 2007-08 marketing year will be heavily influenced by the magnitude of plantings in South America and the prospective size of the 2008 harvest there.
With sharply declining stocks, expect prices to be extremely volatile, with a strengthening of the basis as the year progresses. The early expectation is for a 2007-08 average farm price near $7.50.
Year to End With Large Stocks
The USDA’s estimate of June 1 soybean inventories, at 1.091 billion bushels, implied that 698 million bushels of U.S. soybeans were used during the third quarter of the 2006-07 marketing year (Table 1). The Census Bureau estimated that 452.5 million bushels were crushed domestically during the quarter. The total crush for the first three quarters of the year was 1.361 billion bushels, 3.8 percent larger than the crush during the same three quarters last year. For the year, the USDA forecasts the domestic crush at 1.78 billion bushels, 2.4 percent larger than the crush during the previous year.
The implication of the USDA forecast is that crush during the last quarter of the year will total 419 million bushels, 9 million less than the crush of a year earlier. Last year, an unusually large percentage of the annual crush occurred during the fourth quarter. The USDA’s projection for the current year reflects a more normal percentage, but a slow down from the pace of crush during the first three quarters. The Census crush estimate for June will be released on July 26. With expanding poultry and livestock production and brisk exports supporting soybean meal consumption, a slow down in the crush is not expected to be shown in that report. We project the annual crush at 1.79 billion bushels (Table 2). The larger crush appears justified based on the continued increase in poultry and livestock numbers. We expect both meal and oil consumption to be slightly larger than the USDA projections (Tables 3 and 4).
Exports during the third quarter of the year totaled 220.8 million bushels, 15 million more than during the same quarter last year and equal to the recent high for the quarter established in 2001. Exports during the first three quarters of the year totaled 971.5 million bushels, 20 percent larger than the total during the same period last year. Through May, the Census Bureau estimate of exports trailed the USDA estimates by 6 to 7 million bushels. USDA export estimates for June and the first three weeks of July totaled 64 million bushels, about the same as during the same period last year. For the year, the USDA expects exports to reach 1.09 billion bushels, 15 percent more than exported last year. To reach that level, exports during the last 6 weeks of the marketing year need to average about 9.3 million bushels per weeks, assuming that Census Bureau estimates still lag the USDA estimates by a few million bushels. The average weekly rate for the four weeks ended July 19 was 6.94 million bushels. It appears that exports will be near the 1.09 billion bushels projected by the USDA, but could differ by as much as 10 million bushels.
Seed, feed and residual use of soybeans during the first three quarters of the year totaled 219.8 million bushels. For the year, the USDA projects use in the category at 171 million bushels, implying fourth quarter use of -48.8 million bushels. The average fourth quarter use over the past 5 years was -49.2 million bushels. The USDA forecast for the year appears reasonable. It now appears that total use of soybeans during the 2006-07 marketing year will reach 3.051 billion bushels, leaving year ending stocks at 591 million bushels. The USDA’s report of July 12, forecast year ending stocks at 600 million bushels.
Acreage Down Sharply
In the June Acreage report, the USDA estimated that U.S. producers planted 64.081 million acres of soybeans in 2007 (Table 5). That estimate is 3.059 million less than indicated in the March Prospective Plantings report and 11.441 million less than the record plantings of 2006. Acreage is at the lowest level in 12 years. Planted acreage reportedly declined by 6.3 million acres in the western and northern corn belt and 3.95 million in the eastern corn belt (Table 6). Acreage was increased modestly in southeastern states. Based on conditions at the time of the June survey, the USDA projects harvested acreage of soybeans in 2007 at 63.285 million acres, only 796,000 (1.2 percent) less than planted acreage. The projected harvested-to planted ratio of .9876 is very near the previous five-year average of .9856. The projection of harvested acreage is 11.317 million below the record acreage of 2006.
Based on regional trend yields from 1989 through 2006, the USDA’s World Agricultural Outlook Board (WAOB), calculated the 2007 trend yield at 41.5 bushels per acre, 1.2 bushels below the 2006 average and 1.5 bushels below the record large yield of 2005. The USDA’s National Agricultural Statistics Service will release the first forecast of yield and production on August 10. For now, the market generally uses a combination of trend yield and crop condition ratings to anticipate the average yield.
There has been a good correlation between the U.S. average trend-adjusted yield and the percent of the crop rated in good or excellent condition at the end of the growing season. The USDA’s rating of crop conditions for the largest producing states has been available since 1986. For the 21 years from 1986 through 2006, the percent of the crop rated good or excellent at the end of the season explained about 83 percent of the annual variation in the average trend-adjusted yield. That relationship is expressed as:
yield = 30.27 + .1954 times % rated good or excellent.
As the growing season progresses, this relationship can be used as a guide to form yield expectations. Since there is not a perfect correlation between crop ratings and yield and since crop ratings will likely change by the end of the season, a forecast based on this relationship should be used cautiously, particularly early in the growing season. As of July 22, for example, 61 percent of the crop was rated in good or excellent condition. If that rating holds through the end of the season, an average yield of about 42.2 bushels might be expected. With soybean yields so dependent on August weather, a yield forecast is made with a relatively low level of confidence. A forecast of 42 bushels is used here. Reports of soybean rust in Texas and Arkansas pose some threat for yields, but should be easily controlled and is not expected to impact the midwest crop.
A yield of 42 bushels and harvested area of 63.285 million acres points to a 2007 crop of about 2.66 billion bushels, nearly 530 million bushels less than the record crop of 2006, but about 35 million larger than the WAOB July projection.
Stocks to Decline
The demand for U.S. soybeans and soybean products during the 2007-08 marketing year will depend on a large number of factors. These factors will also influence the magnitude of soybean acreage required in the U.S. in 2008. One of these factors is the rate of increase in soybean meal consumption in China and the resulting demand for soybean imports. The USDA estimates that China consumed 30.6 million tons of soybean meal in 2005-06 and projects use during the current year at 31.9 million tons. China imported 1.04 billion bushels of soybeans in 2005-06 and is expected to import 1.1 billion bushels this year. For 2007-08, the USDA projects Chinese soybean meal consumption at 34.6 million tons and Chinese soybean imports at 1.27 billion bushels. Recent widespread disease-related death losses in the Chinese hog industry and cancellation of some soybean import contracts, however, raise some red flags about the potential growth in soybean meal consumption during the year ahead.
A second factor influencing demand for U.S. soybeans is the likely size of the 2008 soybean crop in South America. The recent sharp increase in soybean prices was viewed as supportive of a significant increase in acreage. Now that prices are moderating and the Brazilian currency remains strong, there is more uncertainty about the acreage response. In its July 12 forecasts, the USDA projected an increase of 3.9 percent in soybean acreage in Brazil, a 5.7 percent increase in Argentina, and 3.6 percent increase in the rest of South America. Acreage for all of South America in 2008 was projected at 104 million acres, about 4.5 million more than harvested in 2007. The 2008 South American crop was projected at 4.3 billion bushels, only 75 million bushels larger than the 2007 harvest. Unless acreage in South America exceeds current projections, there may be a need to expand U.S. acreage in 2008.
A third factor influencing soybean demand will be the rate of growth in biodiesel production, not only in the U.S. where soybean oil is the major vegetable oil used, but in the rest of the world. Europe is moving more rapidly to biodiesel production than the U.S., using primarily canola oil, increasing the demand for other vegetable oils for human consumption. The domestic soybean crush in 2007-08 will still be driven by soybean meal demand, but the rate of biodiesel use of soybean oil will influence soybean oil and soybean prices. The USDA estimates that 1.555 billion pounds of soybean oil were used domestically to produce methyl ester for biodiesel production in 2005-06. Use is projected at 2.4 billion pounds for the current year and 3.5 billion pounds in 2007-08. The Census Bureau releases monthly estimates of the amount of soybean oil and all fats and oils used for methyl ester production. The latest estimates are available for May 2007, indicating that 244.1 million pounds of soybean oil and 273.7 million pounds of all fats and oils were used during that month. Methyl esters accounted for 14.3 percent of total domestic soybean oil consumption and 10 percent of domestic consumption of all fats and oils.
A fourth factor influencing soybean demand during the year ahead is the domestic feed demand for soybean meal. Livestock and poultry numbers, livestock profitability, the availability and use of ethanol co-products, and the relative price of soybean meal to other feed ingredients will all be important for soybean meal demand.
In the projections released on July 12, the USDA projected the domestic crush during the 2007-08 marketing year at 1.8 billion bushels, 20 million more than the projection for this year (10 million more than our projection). Marketing year exports were forecast at 1.02 billion bushels, 70 million less than expected this year. In light of expanding poultry and livestock production domestically and expectations of a modest increase in South American production, these forecasts appear conservative, but reflected the expectation of a small 2007 harvest, sharply declining stocks, and high prices. If the 2007 crop is a little larger, as we project, use may also be larger, but stocks will decline significantly. We project use at 3.035 billion bushels and year ending stocks at 230 million bushels.
Price Prospects
Soybean prices have been on a roller-coaster in recent weeks. Futures traded
limit-up following the June 29 Acreage report, but dropped dramatically with a reversal of weather prospects in mid-July. The average spot cash price of soybeans in central Illinois reached a marketing year high of $8.545 on July 13, but stood at 7.455 on July 23, reflecting a basis of -$.71 under August futures. The ample supply of old crop soybeans along with the speculative premium in soybean futures combined to yield a near record weak basis. November 2007 soybean futures traded to a contract high of $9.495 on July 13 but settled at $8.41 on July 23. The average cash bid for harvest delivery on July 23 was $7.72, reflecting a near record weak basis of $-.69.
Soybean prices are expected to remain extremely volatile as the market works through the uncertainties of U.S. crop size, Chinese demand, South American acreage, and the unknown demand for U.S. soybean acreage in 2008. Basis levels, however, should firm significantly as the 2007-08 marketing year progresses due to the tightening of domestic inventories. The current price structure is rewarding storage of the 2007 crop. The stored crop will have to be forward priced, however, to offer a reasonable chance to capture that return to storage. Unless buyers are bidding a strong basis for deferred delivery, the stored crop will have to be hedged in order to capture the potential basis gain.
The projected 2007-08 marketing year ending stocks-to-use ratio of 7.6 percent suggests a 2007-08 average farm price near $7.50. Futures settlement prices on July 23 pointed to an average farm price near $8.40. Prices may have to be higher than projected by the stocks-to-use ratio to encourage more soybean acreage in the U.S. in 2008. At least a period of high prices might be required, depending on the level of corn prices. Even though prices have declined sharply, values are still quite high.
A strategy that involves storing as much of the crop as possible is encouraged by the current price structure, particularly if on-farm storage is available. Hedging, or using hedged-to-arrive contracts, on a significant portion of that stored crop to capture basis gain appears warranted. Declining crop condition ratings and/or late-season weather rallies may offer an opportunity to place the storage hedges prior to harvest. Storing some of the crop unpriced may pay off if the market has to buy more U.S. acres in 2008 or if South American or U.S. crops experience some weather problems.
Source: Darrel Good, Extension Economist, University of Illinois, Grain Price Outlook for July 2007.
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