Soybeans remind me of the Eveready battery ad: they just keep on ticking! In spite of significant headwinds, soybeans managed to close into new highs this year after USDA’s March 9 report.
Although this isn’t the panacea of a bull market, the fact we made new highs in a year full of soybean market hate is significant. The March 31 survey-based Planting Intentions report will speak volumes, but some items in the background deserve attention.
Some Underestimate Demand. We have to go back to Oct. 1, 2014, when record soybean acres and yield resulted in a record supply of 4.07 billion bushels and record estimated usage of 3.66 billion bushels, according to USDA, resulting in ending stocks of 410 million bushels—the highest in 10 years. Some firms predicted $7.50 soybeans were inevitable. USDA and others underestimated demand by 77 million bushels; stocks ended the year at 333 million bushels.
Fortunately, the trend by USDA and some major think tanks is to underestimate demand for protein such as soybeans and meal. That has allowed demand to keep up with growing supply, especially from South America.
USDA has predicted a slight reduction in 2016 soybean acres. Anecdotal information about producer preferences seems to support USDA’s analysis. Price and weather are still influencing spring acreage, and the June 30 revised acreage report will influence prices. Barring a yield-reducing weather event, it will be important to see whether USDA again underestimates demand.
Reasons For Optimism. There are headwinds, to be sure, but I believe there are reasons to be optimistic:
- It is possible that Argentine producers’ supplies—held in bags awaiting a reduction in taxes—are not as large as media hype suggested.
- China’s gross domestic product, while not growing at 10%, is still growing.
- Both Argentina and Brazil might very well have seen the bottom of their long slide in currency relative to the U.S. dollar. Perhaps the economic risk in South America has been discounted in their currencies.
- China meal usage is predicted to increase.
- Lower prices will hinder global soybean production.
Supply Deficit Ahead? I call all of this the Reaganomics of soybeans. If we slow the rate at which soybean production increases and demand grows steadily, albeit more slowly, a supply deficit emerges.
If yield is not near record levels and instead drops to the eight-year average of 43 bu. per acre versus USDA’s 46.7 bu. per acre, ending stocks will drop to near 100 million bushels, requiring demand rationing—a far cry from today’s environment.
Large soybean ending stocks between 440 million bushels and 550 million bushels are predicted in 2016, but historically USDA has underestimated some demand. That could be good news for prices.