Soybean prices of $13/bu. are not justified by fundamentals.
Soybeans have been the brightest star in commodity markets for several months now, but price pressure might be heading your way. "Chicago (the Board of Trade) is overvalued," said Thomas Mielke, executive director of ISTA Mielke GmbH, Oil World, a research organization based in Hamburg, Germany.
"Global production is bearish. Soybean prices of $13/bu. are not justified by fundamentals," he said. "There is a relatively high likelihood that prices will decline, but timing is the issue," Mielke said at the Oilseed & Grain Trade Summit Oct. 22 in Minneapolis. "I expect weaker soybean and meal prices in the medium term." World production of oils and fats is growing faster than consumption, he added. "Total oilseed production is increasing sharply. The price outlook is not bullish."
Mielke forecasts that South America will produce a record soybean crop of 155 million metric tons (MT) of soybeans in 2013/14, up 10 million MT from 2012/13. The one unknown, however, is Argentina, the No. 3 world producer. That’s because of drought on 70% of Argentina’s soybean area. Planting is way behind normal as a result. "It’s not too late, but time will be running out over the next four weeks," Mielke said.
One reason why soybean prices are still so strong is huge logistical challenges in both Brazil and Argentina. "They have huge production on paper but can’t move it," Mielke said. "The world needs U.S. supplies." He noted that China has begun "investing aggressively" in South America’s soybean export infrastructure.
Mielke pointed out that while the U.S. is a major soybean exporter, as a whole, it is a net importer of fats and oils. At times of late, it has even imported soybean oil from Argentina, he said.
The good news: The demand outlook soybean oil is a positive one, Mielke said. Demand for biodiesel in particular is increasing substantially, with a growing host of countries implementing plans to increase its use. "This is quite a change," he said. Brazil and Indonesia have announced major biodiesel projects. "It’s very likely that Brazil will have a 7% biodiesel mandate," Mielke said. In addition, Argentina is exporting biodiesel to Africa and Iran because it’s economical to use it, he said.
As a result, while he believes soybean futures are overvalued, soybean oil futures are actually undervalued. "The growth of biodiesel will have an effect on price." Because soybean oil cannot be produced without also producing meal, he looks for weaker meal at the same time soybean oil prices increase.
Mielke expects China to continue to be a large importer of soybeans and has a stated goal to increase its stocks. One shift is that China is importing more soybeans and less meal as it has become the world’s largest soybean crusher. The result, he added, is that Brazil is exporting more soybeans, less product, to China. Overall, he predicts strong demand for the next 10 to 15 years.
Soybean oil also has more competition from increasing palm oil, Mielke said. "Palm oil production has doubled every 10 years since 1980." He expects that rate of production expansion to slow down to 2020, however. "Palm oil has become the most important oil, replacing soybean oil and that trend will continue," he said. Palm oil now makes up 60% of oil exports. "We have to face it. This is (impacting) the price of soybean oil and profits of farmers. A palm tree is like a milk cow. You can’t stop it from producing."