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"Cash prices will likely decline below the Commodity Credit
Corporation loan rate, and there is an outside chance they could
challenge the October 2004 lows," said Darrel Good. "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." Good's comments came as he
reviewed soybean prices, which 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 Oct. 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," said Good. "Lows in those four
years ranged from $3.87.5 to $4.29.5 per bushel. Futures prices
recovered quickly after harvest, even as the production and
carry-over 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 $5.15.5 on Nov. 23 and again on Dec. 27
as basis strengthened significantly. The cash price was as high as
$5.47 as recently as Jan. 10."
Good said 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 eight-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, at 183 million bushels.
"The exports were driven by shipments to China," Good noted.
"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," Good said. "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."
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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 with 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 cents per bushel.
"Ironically, soybean prices declined following the release of the
new projections," said Good. "March 2005 futures declined 24 cents,
and the central Illinois cash price declined 22 cents, 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 they now appear vulnerable to those same
fundamental factors, he added.
The monthly report by the National Oilseed Processors Association
released on Jan. 14, showed a smaller-than-expected soybean crush in
December 2004. In an unusual pattern, the December crush was smaller
than the November crush and was only 5 million bushels, or 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 slowdown in the domestic crush was reported at the time that
many analysts are also anticipating a slowdown in export sales to
China," said Good. "While Chinese demand remains strong, South
American supplies will provide seasonal competition for U.S.
soybeans over the next several months. As of Jan. 6, 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."
[University of Illinois news release]
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