March soybean futures have been on a downward trajectory since harvest and support remains elusive. World stocks have been building due to both weakening world demand for soybeans and stronger production.
Given that soybeans are more dependent than corn on the export market and face formidable competition from South American growers, soybean prices are expected to remain weak through 2012.
According to USDA’s latest World Agricultural Supply and Demand Estimates
, world 2011-12 ending stocks of soybeans are projected at 63.56 million metric tons, which represents 25 percent of total world use. "Global consumption hasn’t changed much since the 2007-08 crop year, but we’ve had a couple of years where reserves have built," says Frayne Olson, agricultural economist with North Dakota State University. "No one is worried that we are going to run out of soybeans." He expects 2012 U.S. soybean prices to spend most of their time between $10 and $12/bu., which is about 70 cents higher than USDA’s projection on both the low end and high end.
Domestic stocks are not as large as global reserves, at least not in USDA’s latest estimate, which put ending stocks at 230 million bushels, which is 6.5 percent of global use and 12 percent of domestic use. "I think U.S. ending stocks are at least 100 million bushels larger than that because China is not buying as many beans from us this year," says Peter Georgantones, Abbott Futures, Minneapolis.
Even though U.S. production has declined in recent years, from 91.42 million metric tons in 2009 to 82.89 million metric tons in 2011, both world and U.S. stocks continue to build as South America expands production. In 2009, Brazil and Argentina produced 123.5 million metric tons of soybeans. Last year, South American growers harvested 127 million metric tons.
Competition means more beans for domestic use
In December’s WASDE report, USDA reduced U.S. soybean exports by 25 million bushels to 1.3 billion bushels to reflect the slow pace of shipments and outstanding sales through November and strong export competition from South America. Still, USDA expects about 46 percent of 2011-2 soybean production to be exported, but others are not convinced demand for U.S. beans will be that strong.
"It feels like the bloom is off the rose," says Ross Brainard, merchandiser with Commodity Specialists Co., Kansas City. "The soybean market is becoming much more of a domestic market as China looks to South America for product. If I were a soybean farmer, I would have some of my 2012 crop sold." Even though Brainard expects a weakening global economy as well as softer soybean prices, he says drought in a key bean-producing region of the world would change the entire forecast.
Georgantones expects soybean prices to drop into the $9/bu. range in 2012. "A few dry pockets have developed in Argentina and that’s the only savior the soybean market has for a rally," he says. "You are grasping at straws if you want to find a silver lining in this market."
European problems to weigh
From a macroeconomic perspective, Europe’s debt crisis continues to put downward pressure on many commodities. Olson notes problems in Europe have both a direct and indirect impact on price. Indirectly, the situation in Europe influences how the financial community responds—whether they short the market or lay off risk by pulling money out of soybeans and putting it into what they view as safer investments. End users also make decisions, such as whether to build reserves or operate hand-to-mouth, based on the same market psychology.
The other more direct way the European situation has affected soybean prices, he says, is in the exchange rates. In 2008, before the financial crisis hit, one euro was worth about $1.58. By mid-December 2011 the exchange rate had dropped to $1.30. "If Europe’s problems worsen, people will pull money out of Europe and put it into the United States," says Olson. "As demand for the dollar increases so, too, does its value." A strong dollar means U.S. goods, including soybeans, are less competitive on world markets.
Strong corn and dried distillers grains prices are supporting soybean meal prices, which in turn is helping the profit margins of oil crushers. "Biodiesel mandates are large enough now that they are also playing a role in soybean prices," says Olson. Today, he says, 19 percent of total U.S. soybean use goes into the biodiesel industry.
If weather problems escalate in South America, U.S. soybean prices could tack on 75 cents to $1/bu. by the middle of winter, says Olson. If prices are near $12/bu. next spring, soybean acreage won’t fall that much. "In most of the budgets I’ve seen, corn is the dominant crop, be we can’t afford to lose too many soybean acres," he adds. If, however, South American growing regions escape poor weather and prices continue to fall, there could be a significant shift out of soybeans and into corn.
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