Soybeans: The Tale of Two Story's
Apr 29, 2013
Soybean traders continue to argue and debate a story of two complete opposites. You have the "old-crop" story, which by all accounts remains bullish, on what appears to be an almost impossible solution for supply side of the equation to solve. The cash basis continues to push well beyond $1.00 in many locations across the country. How much further will it go, simply remains an "unknown." We are officially in uncharted waters with old-crop supply. Personally, I doubt we have seen the final push, though it seems to be getting closer and closer. On the flip side, the "new-crop" story couldn't be more intimidating for US producers. The three main driving forces behind the previous strength in the soybean market have ALL reversed course.
Chinese Soy Demand: With China taking some 60-65% of all the global soybean trade, their direction is highly monitored. The past few years we have seen explosive growth in Chinese soybean demand. In the April 2003 WASDE report, Chinese soybean imports were raised to a NEW record of 16.5 million metric tons. Fast forward 10-years, and Chinese soybean imports were thought to possibly reach 63.0 million metric tons. Now all of a sudden the USDA is backing off that estimate reducing it down to 61.0MMT's, with talk in the trade that it could soon be lowered again and again during the next few months. The Chinese economy is slipping and the "bird-flu" virus is causing major panic among consumers. In the process poultry and pork demand is plummeting. From what I have heard, as of ate last week close to 150,000 birds have been culled and 200 plus poultry markets closed across China. The implications on overall feed demand is certainly bearish, but to what extent is still not known, and may not be known for some time. I hate to say it, but this could be a "black swan" swimming right in front of our face, especially if the new H7N9 bird-flu virus is not contained. The last I heard, there are now over 125 reported case and 24 deaths. You need to recognize that growth in Chinese "soy demand" has been one of the main driving forces for higher soy prices. With out any growth this year the "demand" side of the equation could be extremely limited. From Jan-Mar Chinese soy imports have already dropped by 13%... I should also point out, late last week, the International Grain Council cuts China's current year soybean imports 2 million metric tons down to 59 million metric tons due to bird-flu complications. This Is REAL...
South American Production: In order to help meet and keep up with Chinese demand, South America's production has exploded. During the 2000/2001 crop year the WASDE reported Argentine soy production at 27.8 million metric tons, today they are estimating around 51.5 million tons will be produced. Even more impressive is Brazil, who was producing 39 million metric tons of soybeans back in 00/01 and is now producing and estimated 83.5 million metric tons. Keep in mind we are talking about 25-30 million metric tons MORE out of South America as compared to last year. Last years rally to the $17-$18 range was sparked by a major hiccup in South American production. This key dynamic associated with higher prices has obviously shifted back the other direction.
US Production: The USDA is currently estimating US producers will plant our largest ever soybean crop, with an estimated 77.1 million acres going in the ground. The kicker is, this number could continue to get larger and large as producers switch more acres to beans. Certainly some of the acres to the extreme North and South will end up in "Preventive Plant" rather making the jump to more soybean acres. In the end though I am afraid our new record is going to be broken a couple of more times as the USDA ultimately pushes soybean acres another 1-3 million higher. Lets also keep in mind US producers harvested very good soy yields considering the extreme growing conditions. This has some in the industry not only fearing a new record number of acres, but possible even a new record yield. All of which could lead to a major increase in supply, on the heels of major supply increase in South America and slowing demand growth in China.
When you see the three major dynamics of the bull market not just shifting, but actually reversing, it is hard to be highly optimistic about soybean prices moving forward. Certainly there are some weather worries and some bullish wild-cards still in the deck, but the potential for us to draw out to a strong bullish hand is getting slimmer and slimmer. I think my good friend and "Grain Guru" Andy Daniels summed it up best late last week when he said, "I do NOT want to get caught up in the dangerous old crop sport, 'the running of the bulls,' and miss the nucrop main event, 'dancing of the bears.'" Click here now for my full report.