Soybean markets have rallied significantly throughout 2002, but the initial portion of the upswing in prices probably was due to typical seasonal gains, says George Shumaker, University of Georgia Extension economist.
“However, the latter part of the rally that pushed prices up $1 per bushel was due to supply concerns. Hot and dry weather in many portions of the soybean growing areas reduced yield potentials. Strong demand contributed to the rally. Concerns about lower support rates under the new farm bill faded as prices surged,” says Shumaker.
Worldwide production of soybeans will be slightly larger during the 2002 marketing year despite a smaller U.S. crop, says Shumaker. Increased production from South America — especially in Brazil — will nearly offset the U.S. shortfall, he adds.
“Production likely will remain nearly steady in Argentina despite major financial problems. Other ‘minor’ producing countries also will see increased production. The total world crop is projected to be about 184 million metric tons,” notes the economist.
Worldwide consumption of soybeans is projected to increase again for the 2002 crop marketing year, but at a rate slower than observed over the previous two years, says Shumaker. Total consumption should be near 190 million metric tons, outstripping production by more than 3 percent.
The United States, says Shumaker, is the only major soybean-consuming nation with a projected decrease in consumption. Brazil, Argentina, the EU-15, Japan and China all are likely to use more soybeans this marketing year than last. Total off-take will increase about 6 million metric tons over last year compared to annual increases of nearly 12 million metric tons posted the two prior years.
“World soybean trade during the 2002 crop marketing year is projected to be record-large at about 60 million metric tons compared to last year's trade of nearly 56 million metric tons.
“The most eye-catching feature of the trade numbers is the 3.7 million increase in Chinese imports to total a record 14 million metric tons. This increase shows a continuation of significant Chinese imports in recent years from under 3 million metrics tons in 1998 to the projected 14 million this year.”
World ending stocks are projected to decline from 30.6 to 25.4 million metric tons, an 18 percent drop, to the lowest levels since the 1997 crop marketing year, according to Shumaker.
“All major keepers of carry-over stocks should see declines in stocks with the largest drops in Argentina and Brazil. The U.S. season-average price for soybeans for the 1997 crop year when world stocks were this tight was $6.47 per bushel.”
Soybean planted acres across the United States declined in 2002 from 74.1 last year to 73 million acres according to the September USDA Crop Production Report. This is the second consecutive year for reduced U.S. soybean acres.
Current projections for harvested acres is 71.8 million acres, the lowest level since 1998. The current projected percent of acres to be harvested is 98.4 percent which may well prove to be high based on other years in which yields are below-average when percent of planted acres harvested tends to be lower than average.
If this proves to be the case this year and yields turn out to be as projected, production will be less and prices could be supported as a result.
Current yields are projected at 37 bushels per acre, one half bushel per acre higher than in the August report, but down from the 39.6 bushels per acre harvested last year.
Total production is projected to be 2.656 billion bushels, down 8 percent from last year's record crop of 2.891 billion bushels. This current crop projection is nearly identical to the 1999 crop and except for that would be the lowest since 1996.
Total supplies of U.S. soybeans are projected to be about 2.856 billion bushels when the 195-million bushel carry-over is added to current production. This is down 9 percent from the 3.141 billion bushel total supply of last year and the lowest total supply since the 1997 crop year.
Given the sharp reduction in available marketable supplies, it is inevitable that off-take will be reduced. The latest USDA projection of total use during the 2002 crop marketing year is 2.696 billion bushels, down about 250 million bushels or 8.5 percent, one of the largest year-over-year reductions in use in recent years.
Both major-use categories will decline in off-take.
Domestic crush is projected to fall from 1.705 billion bushels to 1.675 billion bushels or only 30 million bushels of the projected 250 million bushel drop. That leaves the exports market to make up the difference.
Current projections are for exports to fall 210 million bushels to 850 million bushels, the lowest level since 1998. The seed and residual category is lowered by 10 million bushels.
If all of the previous projections come to pass, U.S. ending stocks will drop to 160 million bushels, the lowest level since the 1996 crop year. This level of stocks is commensurate with high price levels. The stocks-to-use ratio is also at a very tight level of only 5.9 percent of use. Given the tight stocks situation, price should be well supported until the situation on the coming crop in South America becomes clear.
USDA currently projects season-average prices received by farmers to be near an average of $5.60 with a 45-cent range around that point figure. Even if prices are near the upper end of the range, they would be low by historical comparison to stocks. Any threat to the South American crop should stimulate a further rally during the winter or spring, says Shumaker.
In recent years, the seasonal movement of soybean prices during the post-harvest period has been tempered by increasing production in South America. The amount of carry provided by deferred futures has also been lower than the cost of storage.
“This makes storing soybeans with profit hopes tied strictly to futures price improvement a difficult proposition for many. In that situation, sales at harvest with the purchase of a slightly out-of-the-money call option to guard against a Southern crop threat would seem to be a good choice.
“If there is a good chance of basis improvement from the harvest period, then a delayed sale may be a good choice. Storage costs about six to nine cents per month including interest opportunity cost. So, basis improvement and/or futures gains need to exceed that amount to make storage profitable.
“I favor the call option alternative to storage since it limits potential downside risk to the cost of the option whereas with a stored commodity, there remains the chance that prices could fall.”
Most of the revenue received from sale at harvest could be put to immediate use paying bills or earning interest, says Shumaker. If the option does gain in value, it would provide a very high rate of return on the risk capital.
“That is, a 31-cent gain would be a 100-percent return on the cost of the option but would only provide a 6 percent return on soybeans sold for $5.40 at harvest. Good leverage and a great return on investment.”