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"If the large crops do materialize,
prices will likely decline even further, but uncertainty abounds,"
said Darrel Good. "The lessons learned this year include the merits
of spreading sales throughout the marketing year and the merits of
using options in making pricing decisions."
Good's comments came as he reviewed
recent events in the soybean market. August 2004 soybean futures
reached a high of $10.26 on March 24 and traded to a low of $7.05 on
July 16.
"While some have termed the decline as
unprecedented, it is reminiscent of some past price behavior," Good
noted.
July 1977 soybean futures reached a
contract high of $10.64 in May 1977 and traded below $6 per bushel
in July 1977, declining nearly $4 in less than a month. July 1988
futures reached a high of $10.995 in late June 1988 and declined to
$8.20 at maturity, dropping $2 in the last week of trading.
"The most dramatic decline was in 1973,
when the July contract reached a high of $12.90 in early June 1973
and traded below $6.50 in early July," said Good. "However, that
contract rebounded to $10.25 at maturity."
The current price decline has also been
associated with a free fall in the basis. The central Illinois cash
bid was $1.34 above the August futures on July 8 and 23.5 cents
above that contract on July 16. Again, the collapse in the basis is
not unprecedented.
Good noted that the Chicago cash bid
was $1.14 above August futures in early June 1973 and was $1.35
below that contract in late July.
"Such a collapse did not occur in the
summer of 1977," he said. "The difference that year was that July
futures did not attain the large premium to the August contract that
occurred in both 1973 and 2004. Such large inverses appear to be a
mistake."
Many producers may have questions about
what will happen next. Will prices remain low and continue to
decline as has typically been the case with the demise of bull
markets, or will there be a final gasp higher as in 1973?
"The answers may be determined
primarily by two factors," said Good. "The first is how well
processors and end users have prepared for the extremely tight
inventory situation. The extreme tightness in U.S. stocks has been
advertised since December 2003, and the shortfall in South American
production was advertised early in the spring.
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"If end users prepared for this
scenario, one would expect that their inventories of product,
particularly soybean meal, are larger than normal. In addition,
arrangement for imports of soybean meal might have been made. The
latter does not seem to be the case, however, as the USDA lowered
the projection of marketing-year meal imports by 150,000 tons in
last week's report of supply and demand prospects. The projection of
soybean oil imports was increased by 50 million pounds."
Good added that the second of the
important fundamental factors is the timing of the availability of
new-crop soybeans. The crops in Arkansas, Louisiana and Mississippi
appear to be maturing earlier than normal, but there is some
disagreement on how early harvest will occur. Those early harvested
soybeans may be needed in the domestic processing market, so
logistics could be an issue as well.
Beyond the next four to six weeks, the
size of the U.S. crop will be the most important price factor. After
that, Chinese demand and South American crop prospects become
important.
"The market will continue to follow the
USDA's weekly report of crop conditions to gauge yield potential,
but considerable uncertainty about crop size may persist as late as
early September," said Good. "Crop condition rating as of June 11
showed 68 percent of the crop in good or excellent condition, with
the highest ratings in Kansas, Kentucky, Mississippi and Tennessee.
Ratings were also above the national average in Illinois and Iowa.
Based on historical relationships, current ratings point to the
potential of a high average yield, but such potential has not always
materialized. The most recent instance, of course, was last year."
Despite a recent slowdown in soybean
imports by China, the USDA expects an 8 percent increase in soybean
consumption and a sharp rebound in imports by China during the year
ahead. Chinese imports totaled 790 million bushels in 2002-03, are
projected at 660 million for the current year, and at 880 million in
2004-05.
"The USDA
projects a 7 percent increase in South American soybean area for the
coming year," Good said. "Acreage is expected to expand by 10
percent in Brazil. A return to more normal yields in 2005 would
result in a large increase in South American production, projected
at 21 percent by the USDA.
[University
of Illinois news release]
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