A perfect storm has developed to push bean prices lower, and the losses likely haven’t run their course yet.
"The soybean market could make a run at the $15.50 area," says Adam Stout, risk management consultant for INTL FCStone, Kansas City. "The corn and soybean markets are tired. We need fresh news to continue to propel these markets higher."
On Sept. 13, the Federal Reserve announced that it will purchase additional agency mortgage-backed securities at a pace of $40 billion per month for an unspecified time frame. Corn and soybean prices surged in anticipation of the Fed’s decision, but sold off in the aftermath.
Investors appear to have swapped commodity holdings for equity positions in the wake of the announcement, says Ross Brainerd, merchandizer with Commodity Specialists Co., Kansas City. The stock indexes have gained between about 1 and 3% since Sept. 13, while commodity prices plunged.
November soybean futures closed at $17.43 on Sept. 13. Three trading sessions later, November soybeans closed at $16.40, a 6% drop in value.
Commodities have lost some of their luster as the world economy has slowed. On Monday, Barclays cut its forecast for China’s economic growth in gross domestic product (GDP) to 7.5%, down from its earlier forecast of 7.9 for 2012. The investment bank also cut its 2013 GDP growth forecast to 7.6% from its previous forecast of 8.4%.
"There’s been talk of China cutting back on its soybean purchases, but I don’t think that will happen," says Stout. "China has nearly 1.4 billion people to feed, and the government won’t discourage the importation of food and feed products."
Meanwhile, the U.S. livestock industry has turned to substitute products. "The livestock industry is struggling with tight margins and as a result has reduced consumption of soybean meal as it has become overpriced. The chicken industry is killing birds at lower weights, which is also reducing the demand for soybean meal," says Brainard.
Fundamental factors are also at play in South America. Dry conditions in Brazil’s soybean growing region of Mato Grosso do Sul are expected to allow planting there to progress at a rapid pace. According to USDA’s latest World Agricultural Supply and Demand Estimates, Brazil is expected to produce a soybean crop of 85 million tons, while Argentina is forecast to produce 55 million tons for a combined total of 140 million tons, a more than 30% increase from last year’s drought-ravaged crops.
According to USDA’s latest World Agricultural Weather Highlights bulletin, released this week, weekly rains in August and early September in Argentina have recharged subsoil moistures in time for planting. Dry conditions have continued throughout much of Brazil’s agricultural area but longer-term forecasts call for wetter conditions, which are expected to benefit the crop in Brazil.
"If Brazil gets rain and planting continues with good weather conditions, prices on soybeans and soybean meal could soften," says Brainerd. "But if Brazil were to have another drought, prices could easily go the $19 to $20 level."
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