New Record-High Bean Prices Needed to Ration Demand

July 9, 2012 11:33 PM
New Record-High Bean Prices Needed to Ration Demand

Extended drought in the Corn Belt sent nearby soybean futures to all-time highs Monday. July soybeans broke $16.79, besting the previous record of $16.60 for the nearby futures contract set in July 2008.

See the July soybean chart:

July soybean futures

"We’re in a waiting game right now," says Matt Roberts, agricultural economist with Ohio State University. "Clearly, beans look awful. Conditions are extremely poor."

According to USDA’s Crop Progress report, released late Monday, only 40% of the soybeans in the nation’s top-18 soybean-growing states were rated in good to excellent condition as of July 8. That compares with 45% a week earlier and 66% at this time last year.

The hardest hit states are also those suffering the most severe drought and where corn condition is also poor. Hardest hit is Kentucky with 62% of its beans rated in poor to very poor condition, followed by Missouri with 53%, Indiana with 51%, and Illinois with 42%. Minnesota and the Dakotas remain the nation’s garden spot, with between 59 and 72% of their bean crops in good to excellent shape.

"A break in the dry weather pattern breaks could mitigate and reverse soybean yield loss. Soybeans are regenerative," says Bill Lapp, president of Advanced Economic Solutions, Omaha, Neb.

With so much of the recent focus on corn, analysts are just now starting to rethink the soybean yield. "Until now, we have not seen soybeans rally with the conviction of corn," says Roberts. "I expect soybeans to start to take the lead."

Even if the U.S. soybean crop springs back, the U.S. and global supply of soybeans will be extremely tight from now until South America’s harvest next spring. Soybean supply in the United States, in particular, is much tighter today than it was in 2008 when soybeans set their previous record high, says Lapp. Today’s weather risk is much greater as well.

Roberts notes that soybean producers who sold their crop at a lower price can’t reduce those losses without taking on more risk through various combinations of options. "Now is not the time to take on more risk," notes Roberts.

The China Factor

At the same time U.S. soybean prices are soaring, the economy in China, the world’s most voracious buyer of soybeans, is slowing. "We are so dependent upon China for demand," says Lapp. "China’s total demand is approaching the equivalent of 53 million acres of U.S. beans, and we plant just under 80 million. China would absorb two-thirds of the U.S. bean crop if it were buying only from the United States." This year, China has been buying almost exclusively from the United States due to South America’s short, drought-ravaged 2011-12 crop.

Lapp notes that the only way to get through the current tight stocks situation, which will worsen if yields drop, is to curtail demand. China will have to buy fewer beans and tap into its reserves and/or livestock producers have to cut use. "Both are pretty tall orders," Lapp says.

Roberts doubts that Chinese demand for soybeans will contract, but the rate of growth in exports to China could slow. "There’s still food demand there," he says.

China's economy grew at 8.1% in the first quarter of this year, compared with first-quarter last year, but forecasts for the second half of the year into 2013 are calling for 2 or 3% gains in gross domestic product (GDP) as Chinese exports to Europe slow.

"Historically, when prices get too high, China has decreased soybean demand, but that hasn’t happened recently," Lapp adds.

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