August 23, 1999
WHEN WILL SOYBEAN PRICES MOVE
ABOVE THE LOAN RATE?
The spot cash price of soybeans
in central Illinois dropped below the Commodity Credit Corporation
(CCC) loan rate during the first week of August 1998. Prices moved
above the loan rate in late November and early December, but have
been below the loan rate since then. On August 20, the average
cash price for old crop soybeans was about $1.00 under the loan
rate and the average bid for harvest delivery of the new crop
was about $1.05 under the loan rate.
The most important price factor
for the next few months is the size of the 1999 U.S. harvest.
The USDAs weekly report showed further deterioration in
crop condition during early August. Based on the report released
on August 16, only 51 percent of the crop was rated in good or
excellent condition. That compares to 67 percent on the same date
last year. In late July, when the USDA measured yield potential,
crop conditions were declining rapidly. In the report released
on July 26, 65 percent of the crop was reported in good to excellent
condition. The August 2 report showed that only 57 percent of
the crop was in those two categories. Crop conditions since the
July 26 report have remained stable in Iowa and improved in Minnesota.
The greatest declines in crop condition have occurred in Alabama,
Georgia, Kentucky, South Carolina, and Tennessee.
Recently, the most concern has been
about the crop in the southeast, although some areas received
beneficial rainfall last week. Southern growing areas accounted
for only about 10 percent of the USDAs August production
estimate. The actual size of the 1999 soybean crop is likely smaller
than estimated in August. It would be surprising if the September
estimate is down more than three or four percent. If so, crop
size would still be larger than the projected level of use during
the 1999-00 marketing year, leading to a further build-up in stocks.
Beyond crop size, price will be
influenced by the rate of use of U.S. soybeans and soybean products.
Soybean export sales for the 1999-00 marketing year have started
slowly. As of August 12, 77.6 million bushels had been sold for
export, about 14 percent less than on the same date last year
and about 45 percent below the average of the past three years.
For the upcoming year, the USDA projects a 15 percent increase
The size of the South American harvest
in 2000 will have a significant influence on the demand for U.S.
soybeans and soybean products. Beginning in October, the market
will react to reports of planted acreage and growing conditions
there. Six weeks ago, there was considerable discussion about
the likelihood of reduced soybean acreage in both Brazil and Argentina
due to the low prices of soybeans relative to other commodities.
Private sources were suggesting as much as a 5 percent reduction.
Since then, November futures have advanced about 15 percent. There
is now less chance of acreage declines. If acreage is maintained,
adverse wether will be required to reduce the size of the South
Finally, prospects for the U.S.
crop in 2000 will eventually be a major price factor. If CCC loan
rates are not adjusted, it is expected that soybean acreage will
remain large in 1999, if crop prices in general remain low. There
is some discussion, however, of adjusting loan rates to remove
the incentive to plant more soybeans at the expense of other crops.
Even without an adjustment, market prices of other commodities
would eventually adjust upward to be competitive with the soybean
loan rate, if shortages of those crops developed.
Based on current prospects for U.S.
and South American production, the spot cash price of soybeans
may remain below the loan rate for an extended period of time.
If so, marketing strategies for the 1999 crop will be centered
around the use of loan deficiency payments (LDPs) or the
use of the marketing loan program. Those producers who bump up
against payment limitations for these programs (currently set
at $75,000) may want to store soybeans in anticipation of forfeiture
to the CCC if price remains below the loan rate. Gains from forfeiture
do not count against the payment limitation.
Issued by Darrel
University of Illinois