January 18, 2005
SOYBEAN PRICES TO FACE MORE PRESSURE?
Soybean prices declined sharply from the
spring to the fall of 2004 as the market made the transition
from shortage to abundance. To date, however, prices have
not declined to the extreme lows expected to occur as a result
of the surplus generated by the record crop of 2004.
March 2005 soybean futures declined to $5.10 in early November
and the average overnight spot cash bid in central Illinois
reached a low of $4.80 on October 13. That low is well above
the lows reached in the 1998-99 through 2001-02 marketing
years when supplies were less burdensome than during the current
marketing year. Lows in those four years ranged from $3.875
to $4.295 per bushel. Futures prices recovered quickly after
harvest, even as the production and carryover projections
increased. March 2005 futures traded to the $5.60 level in
late November and again in mid-December. The cash price of
soybeans in central Illinois traded to a high of $5.515 on
November 23 and again on December 27 as basis strengthened
significantly. The cash price was as high as $5.47 as recently
as January 10, 2005.
The higher than expected prices since mid-October reflect
a number of factors. Reportedly, producers have been reluctant
to sell soybeans following the large price declines into harvest.
At the same time, the market required large quantities of
soybeans to refill the pipeline and to meet a large increase
in domestic and export consumption of soybeans. The domestic
monthly soybean crush declined to an 8 year low of 103 million
bushels in August 2004, but exploded to a record 156 million
bushels in October 2004. Similarly, monthly exports declined
to a trickle of about 11 million bushels in August 2004, but
October exports were the largest ever for that month, at 176
million bushels, and November exports were even larger at183
million bushels. The exports were driven largely by shipments
to China. From September 2004 through November 2004, China
imported 197 million bushels of U.S. soybeans, half of all
the U.S. soybeans exported and 24 percent more U.S. soybeans
than imported during the same period in 2003. The combination
of reluctant selling by producers and the market's need for
large quantities of soybeans generated very strong basis levels
and an inversion in the structure of futures prices.
Last week, the USDA production report indicated a slightly
smaller 2004 U.S. crop than forecast in November. The January
estimate of 3.141 billion bushels compares to the November
forecast of 3.15 billion bushels. In addition, the USDA increased
the forecast of the size of the domestic crush during the
current marketing year by 15 million bushels, lowered the
projection of year-ending stocks by 25 million, and increased
the forecast of the 2005 marketing year average farm price
by $.15 per bushels. Ironically, soybean prices declined following
the release of the new projections. March 2005 futures declined
$.24 and the central Illinois cash price declined $.22, to
$5.20, in the three trading days following the report.
To some extent, soybean prices were able to overcome an extremely
bearish fundamental situation from October 2004 through early
January 2005, but now appear vulnerable to those same fundamental
factors. The monthly report by the National Oilseed Processors
Association released on January 14, 2005, showed a smaller
than expected soybean crush in December 2004. In an unusual
pattern, the December crush was smaller than the November
crush and only 5 million bushels, 3.6 percent, larger than
the crush in December 2003. At the same time, soybean oil
inventories at the end of December 2004 were larger than at
the end of November 2004.
The slow down in the domestic crush was reported at the time
that many analysts are also anticipating a slow down in export
sales to China. While Chinese demand remains strong, South
American supplies will provide seasonal competition for U.S.
soybeans over the next several months. As of January 6, 2005,
the USDA reported 60 million bushels of outstanding export
sales to China, compared to 104 million bushels at the same
time last year. The USDA continues to project South American
soybean production at a record 4 billion bushels, 20 percent
larger than last year's harvest.
If the South American crop continues to make good progress,
soybean prices may come under additional pressure. Cash prices
will likely decline below the CCC loan rate and there is an
outside chance they could challenge the October 2004 lows.
Uncertainty about the magnitude of U.S. soybean acreage in
2005 and the potential impact of soybean rust, along with
normal weather uncertainty for the 2005 growing season, will
provide some underlying support to prices and may contribute
to more price volatility from April forward.
Issued by Darrel Good
University of Illinois