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Soybean market     Send a link to a friend

[SEPT. 23, 2003]  URBANA -- With considerable uncertainty on both the supply and demand side of the U.S. soybean situation, pricing decisions are difficult, said a University of Illinois Extension marketing specialist.

"Increasingly, the soybean market is developing a 'short-crop' pattern, with prices moving higher, basis strengthening and inverses in the futures market growing into the harvest period," said Darrel Good. "Historically, short-crop years have produced some of the better pricing opportunities near harvest time."

Good's comments came as he reviewed recent actions in the soybean market and examined "three important fundamental factors" affecting the market.

November 2003 soybean futures traded to about $5.10 in late July as the market reflected expectations of a record U.S. soybean crop near three billion bushels. Since then, the price of that contract has increased sharply, reaching about $6.48 in early trading on Sept. 22. The price rally has been in response to lower production expectations.

"The September USDA crop production report forecast the 2003 harvest at 2.643 billion bushels, the smallest since 1996," said Good. "Early yield reports have generally been on the low side, creating expectations of a lower production forecast in October. November futures have established the highest contract high price since the 1999 contract reached a high of $6.80.

"With U.S. soybean supplies at the lowest level in seven years, the market has become pretty dicey. Prices over the next few months will reflect three important fundamental factors."

First, and of immediate importance, among the factors is the actual size of the 2003 crop.

"Given the nature of the 2003 growing season, it is not surprising that yields from early maturing varieties are low," said Good. "The question is, how much did late August rains in the eastern and southern growing areas benefit later-maturing varieties? Opinions differ widely, but it would not be surprising to see near-normal yields from those varieties in eastern growing areas.

"Many western and northern growing areas did not receive as much late-season rainfall, so that yield prospects there are lower for the later-maturing varieties. Only time will tell if the USDA's September report captured actual yield prospects."

Good added that, historically, there has been no correlation between production forecast changes in September and changes in October. On average since 1970, the crop forecast in September has differed from the estimate in January following harvest by 4 percent. The "error" has ranged from near zero to 9.5 percent.

 

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The second fundamental factor is the rate of consumption of the 2003 U.S. crop.

"If the crop is near 2.64 billion bushels and the minimum year-ending stocks level is about 5 percent of consumption, use during the 2003-04 marketing year would be limited to about 2.654 billion bushels," said Good. "That would be about 170 million bushels less than consumed during the 2003-03 marketing year -- after the 2002-03 consumption estimate is corrected for the apparent underestimate of the size of the 2002 crop.

"The USDA has projected a 60-million-bushel reduction in the domestic crush and a 100-million-bushel reduction in U.S. soybean exports. The question is, when will the pace of consumption begin to fall in line with available supplies?"

Soybean exports during the first 2.5 weeks of the 2003-04 marketing year were about four million less than during the same period last year. However, unshipped sales as of Sept. 11 totaled 311 million bushels, compared with 228 million on the same date last year. All major customers except Mexico have booked more soybeans than at this time last year. The rapid pace of export sales to date magnifies the significance of a smaller crop.

The third fundamental factor, very much related to the second factor, is the potential size of the 2004 South American soybean crop.

"The size of that crop will have an impact on the demand for U.S. soybeans and soybean products," said Good. "In its September report, the USDA forecast an 8.7 percent increase in soybean area in Brazil, a 4.8 percent increase in area in Argentina and a 6.9 percent increase in Paraguay. Combined area in those three countries is expected to increase by 7.1 percent.

"For the past two years, soybean area in Brazil has expanded by 17.4 percent and 12.5 percent, respectively. Area in Argentina increased by 9.6 percent and 10.5 percent, respectively. The recent increase in soybean prices may encourage a larger-than-forecast increase this year, as additional acreage is shifted from other crops to soybeans."

The question then is, what will the average South American soybean yield be in 2004?

"The average was record large in 2003, with new records established in Brazil and Paraguay and the 1998 record equaled in Argentina," said Good. "The USDA has forecast a 1 percent decline in the average South American yield in 2004. Production there is forecast at 3.57 billion bushels, nearly 200 million bushels larger than the 2003 harvest. An increase of that size would offset the smaller crop in the United States."

[University of Illinois news release]

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