Old crop soybeans are on the run again, dragging new crop soybean and corn prices with them. The excitement will come to a head sometime this summer when the poultry industry is fighting over those last few truckloads of soybeans. It could get 12-dollar ugly real fast.
Ascending soybean prices are presenting significant opportunities for farmers, said Roger Knapp, STA Trading Services in Memphis, during the Ag Market Network's March teleconference. “Compared to the spring of last year, we have soybean prices up 75 percent, corn is up 30 percent, rice prices have more than doubled, wheat's up 35 percent, and cotton prices are up 50 percent from the lows of last spring.”
Soybeans are providing the most excitement, despite the fact that world ending stocks of soybeans are higher than two years ago, according to Knapp.
Part of this is because a two-tiered pricing system is at work in the world “due to significant loadout constraints in South America,” Knapp said. This factor appears to be offsetting South American soybeans trading at $1.30 less than U.S. soybeans.
“If South America could load all the ships that the world has a demand for, there would be one price — we would be trading $7 soybeans,” Knapp said. “As it is, they can't load the ships fast enough, because their production capacity has expanded so rapidly. So the rest of the world has to come back to the United States for soybeans.
“This was demonstrated yesterday (March 11) in the export sales report,” Knapp said. “We sold to Malaysia and Indonesia even though those two countries had to pay a $1.30 premium. The wait time for vessel loading in South America is approaching three weeks.”
Meanwhile meal use in the United States is running 3 percent ahead of last year's pace and isn't slowing down. “We also have near record poultry prices. Producers are feeding these animals at a higher rate.”
Even with a forecast of 475,000 tons of imported meal, Knapp expects a shortfall of about 2 million tons, equivalent to five weeks' usage. Unless something happens, he expects the United States will run out of soybeans sometime this summer.
In addition, “We're not likely to see many bean imports because of Asian rust and the liability associated with that. Any catfish farmers or poultry producers who don't have their protein requirements locked up for the summer, should do so immediately because there is not going to be enough to go around. The market needs to ration a shorter supply of meal.”
Knapp noted that some soybean meal customers have indicated that they would not cut meal usage even at $350 a ton. “Meal currently represents 64 percent of the value of the soybean. That's over $12 soybeans. I don't want to make a blind price forecast, but I think that's where we're headed.”
New crop soybeans are going to be a reluctant follower of old crop prices, according to Knapp. “We're going to see a big price spread between old and new. I would recommend to not be in a big hurry on soybeans. If you have old crop left, you just won the jackpot. Hang onto it, because the basis is going to go up significantly over the next two to three months. People need your beans.”
As for new crop, Knapp says it's hard to justify November futures above $7.75. “The only caveat is that the USDA outlook was based on a new crop yield of 40 bushels. Soybean yields have rarely lived up to that level, and any weather problem this summer will send November soybeans above $8.
“We have a very interesting market,” Knapp said. “There is still some upward strength on the old crop. November futures are not going to go down in the short term or at least through June because they're going to be held in place by a continued escalation of old crop futures. We also have a big uncertainty about weather during the summer of 2004.”
The fundamentals for corn are also extremely bullish, according to Knapp. “We have year-end inventories this summer projected to be down to 901 million bushels, which is an 8.7 percent stocks-to-use ratio, the smallest since 1995, when we had $5 corn.
“USDA is projecting new crop corn usage at 10.5 billion bushels. Assuming we can see a 1.5 million-acre increase in planted area this coming spring and no weather problems this summer, USDA is still looking at a 100 million-bushel reduction in carryout stocks in the summer of 2005.
“This is obviously why the spec funds own a record amount of corn, 216,000 contracts as of yesterday (March 11). That equivalent to about 1.1 billion bushels.”
There is a catch. Knapp believes that USDA's Jan. 12 survey of grain stocks underestimated what's really out there. “Simply, when USDA did the survey, they couldn't find the grain. As a result of that low estimate, USDA went back and lowered its production estimate for corn for 2003. USDA lowered the yield estimate by 1 bushel and lowered the harvested area by 100,000 acres to 200,000 acres in every major-producing state.
“In effect, they forced the number to work because they couldn't find the corn,” Knapp said. “At the same time, they raised the usage number to a higher level.”
USDA is currently re-surveying grain elevators and producers and will issue its next grain stocks report on March 31. “There is a reasonably good probability that USDA will report larger-than-expected grain inventories — that they will find some of that missing corn in their surveys.”
If this happens, it won't necessarily wake up a bear, “but it does mean that the outlook for corn is less bullish.”
In the short term, “I look for corn to be a solid $3 item,” Knapp said. “Going into July, if USDA finds that corn, we could see a modest setback since the funds are so long. But the main issue here is 2004 acreage — the competition between corn and soybeans for acreage. So we can't have prices drop very far.”
A weather rally — either too wet to plant in April, or too dry in July could send prices at least 50 cents higher on the board, according to Knapp. “Under a good weather scenario, assuming we get another 1.5 million acres of corn planted, we could see December futures lows this fall of about $2.65.”