June 9, 2003
WHAT IS SUPPORTING SOYBEAN
Soybean prices have declined modestly
from the highs in mid-May, but remain more than $1.00 higher than prices of a
year ago. Higher prices have persisted even as some market fundamentals have turned
a little more negative. The pace of U.S. exports, for example, has slowed enough
that it now appears that shipments for the year will be near the current USDA
projection. The USDA projection will be reached with an average of 4.5 million
bushels of exports per week for the last three months of the marketing year. Shipments
for the week ended May 29 were reported at 3.4 million bushels.
addition to the slower export pace, the pace of the domestic crush is such that
the cumulative crush for the year could be 5 to 10 million bushels less than the
current USDA projection. The cumulative crush for May through August needs to
be about 5.5 percent less than that of a year ago for the marketing year total
to reach the USDA projection of 1.615 billion bushels. For the period January
though April, 2003, the crush was 7 percent less than during the same period last
year. A continuation of that pace would result in a crush of 1.607 billion bushels.
The large inverses in both the soybean meal and soybean oil markets discourage
end users from accumulating inventories and provide incentive to delay purchases
as much as possible until the new crop year.
America has just harvested a record soybean crop and early indications suggest
another significant increase in acreage for harvest in 2004. China has reportedly
expanded soybean acreage in 2003. In addition, some delays in unloading soybeans
in China are reported as a result of a slow down in paperwork to approve receipt
of GMO soybeans.
While far from a perfect planting
season, it appears that most of the 2003 U.S. crop will be planted in a timely
fashion. As of June 1, the USDA reported that 74 percent of the crop had been
planted, compared to 67 percent planted on the same date last year and only 3
percentage points behind the 5 year average planting pace. On a state wide basis,
delays were most significant in Indiana, Kentucky, Louisiana, North Carolina,
and Tennessee. Emergence and early growth of the crop were also delayed by early
season weather conditions, but most agree that yield potential has not yet been
Indications that the rate
of consumption of U.S. soybeans has been reduced sufficiently and that the 2003
crop is not in serious trouble resulted in July futures slipping nearly $.50 from
the extreme high of $6.58 on May 20 to a low of $6.10 on Tuesday and Wednesday
of last week. November 2003 futures declined about $.35 during the same period.
Those declines, however, were followed by a late week price rally. The rally appeared
to be the result of renewed weather and crop concerns.
that dry weather in parts of China might result in a smaller soybean crop in 2003
than in 2002 even with increased acreage keeps the demand story alive. A production
decline would presumably keep Chinese imports at a very high level for another
year. In addition, and perhaps more importantly, concerns about summer weather
prospects in the U.S. intensified. Discussion of the developing La Nina weather
pattern and the potential impact on summer weather conditions moved closer to
the front page. Finally, predictions of the infamous "ridge of high pressure"
began to surface last week. Some began calling for such a ridge to develop by
mid-month, bringing dry conditions to important growing areas. With U.S. stocks
at such a low level, anything less than a trend yield for the 2003 crop means
that supplies could remain very tight for another year.
weather market and resulting higher prices have larger implications for pricing
new crop than pricing old crop soybeans, since the majority of the 2002 crop soybeans
have already been sold. Assuming that weather and crop concerns persist, what
are reasonable price targets for November 2003 futures? Potential price strength
obviously depends on timing, severity, and duration of crop threatening weather.
Spring and/or summer weather rallies over the past 6 years have pushed November
futures to a high ranging from $5.91 (2002) to $7.50 (1997). It is interesting
to note that the contract highs were lower every year from 1996 through 2002.
options to manage summer price risk is one alternative since there is potential
for much lower prices should a favorable growing season unfold. Option premiums,
however, are relatively large. In addition, ownership of options does not eliminate
the soybean pricing decision. That is, even if prices move higher, producers with
options will eventually have to decide when to price soybeans. Another approach
is to spread sales during the summer growing season to at least capture the average
price on a portion of the crop.