 "As the 2007 crop is priced, the market is encouraging that the
crop be stored and priced for later delivery -- selling futures,
using a hedged-to-arrive contract, or a cash contract if the
deferred basis bids are strong," said Darrel Good.Good's
comments came as he reviewed the performance of soybean prices
and implications for the future. Soybean prices have moved
sharply higher since early May, continuing the up trend started
in early October 2006. November 2007 futures, for example, have
increased by about $1.20 since mid-May and by more than $3 since
early October.
"A number of factors have contributed to the increase in
prices at various times over the past nine months," said Good.
"Chief among those was the expectation and eventual confirmation
of a sharp reduction in soybean acreage in the United States
this year.
"A second price-supporting fundamental factor was the
expansion in use of vegetable oils in the production of
biodiesel. While soybean oil stocks have remained large,
expanding consumption of soybean oil, palm oil and canola oil
has resulted in higher prices of vegetable oils."
In the United States, the Census Bureau estimates that
monthly consumption of soybean oil for biodiesel production
expanded from 168 million pounds in January 2007 to 244 million
pounds in May 2007. Biodiesel use of soybean oil accounted for
14 percent of domestic soybean oil consumption in May 2007.
A third factor supporting the recent strength in soybean
prices, Good added, is the need for South America to
substantially expand soybean area for harvest in 2008.
"High prices are thought necessary for that expansion since
production costs are increasing," said Good. "In addition, the
strength of the Brazilian currency requires a higher U.S.
dollar-based price to maintain a given level of profitability."
In its July update, the USDA's World Agricultural Outlook
Board projected a 2007 U.S. harvest of 2.625 billion bushels,
120 million less than the June forecast and 563 million less
than the record crop of 2006. The forecast is based on the
forecast of harvested acreage in the USDA's June Acreage report
and a projected yield of 41.5 bushels based on the analysis of
regional trends since 1989.
"Based on the correlation between the U.S. average yield and
the percent of the crop rated good or excellent at the end of
the growing season, a yield of 41.5 bushels implies a year-end
crop condition rating of only 58 percent good or excellent,"
Good noted. "As of July 8, 65 percent of the crop was rated in
good or excellent condition.
[to top of second column]
 |
 "Crop ratings will be carefully monitored during the critical
part of the growing season over the next six weeks to judge the
potential yield. The USDA's National Agricultural Statistics Service
will release its first yield and production forecasts on Aug. 10."
With a crop of 2.625 billion bushels, the USDA's WAOB projects a
70-million-bushel decline in U.S. soybean exports during the 2007-08
marketing year. South American exports are expected to jump by 255
million bushels, as Chinese imports increased by 165 million
bushels.
Year-ending stocks of soybeans in the United States are expected
to decline from 600 million bushels on Sept. 1, 2007, to 245 million
bushels on Sept. 1, 2008. The WAOB sees the 2007-08 marketing year
average farm price in a range of $7.75 to $8.25, compared with the
$6.35 average for the year ending on Aug. 31, 2007.
"Futures settlement prices for the overnight trade of July 16,
2007, implied a much higher 2007-08 average farm price than forecast
by the USDA," said Good. "November 2007 futures settled at about
$9.21, and July 2008 futures settled at about $9.62. With basis
levels near the average of the past five years, those prices implied
a 2007-08 marketing year average farm price near $9.20.
"Futures prices for the 2008 and 2009 marketing year were at even
higher levels. Prices may continue to be quite volatile as the
growing season wraps up, but current futures prices appear to offer
attractive pricing opportunities."
A bit of a pricing dilemma, however, is presented by the
generally weak soybean basis. For example, on July 13 the average
overnight bid for harvest delivery in south central Illinois was
$8.83, or nearly 60 cents under the settlement price of November
2007 futures. In the previous four years, the basis on the same date
ranged from minus 33 cents to minus 20 cents.
"Following the transportation disruption from hurricane Katrina
in 2005, the basis in that area traded to only minus 44 cents," said
Good. "With a 40-cent spread from November 2007 to July 2008
futures, the current harvest bid is $1 under July 2008 futures.
Currently, the spot cash bid of soybeans in south central Illinois
is extremely weak, at 67 cents under August futures.
"Tightening stocks of soybeans during the upcoming marketing year
suggests that basis levels will return to a more normal level,
meaning that the cash bid in the example area could be about 10
cents under July futures by next spring. If so, the market is
currently offering about 90 cents' return on nine months' storage of
the 2007 crop. At 8 percent, the interest cost for nine months'
storage is near 50 cents, leaving a 40 cents' return to cover
physical storage costs."
[Text from file received
from the University
of Illinois College of Agricultural, Consumer and Environmental
Sciences]
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