The soybean market made another big move up in February and March, providing pricing opportunities for producers at well over $6. While dryness in parts of Brazil provided some momentum for the run-up, it's largely been the result of short coverings by the funds, according to a market analyst.

On the other hand, fundamentally, the market has some problems to work through this year, not the least of which are more than ample supplies coming into the new year.

The world increased soybean production by almost 21 percent in 2004, with most of the increase coming from South America and the United States. World crush grew by only 7 percent during the same time period, according to Alan Brugler, a grain and oilseed analyst, who spoke at the Market Outlook Conference in Memphis. “We can't increase crush fast enough to keep up with growth in production.

“The world has 61.3 tons of soybeans left from last year that nobody wants. That's the largest number we've ever had. We're having to store more beans than we've ever stored before. Somebody has to store it until we use it up. Is it going to be U.S. growers or somebody in Brazil.”

U.S. stocks are estimated at 440 million bushels, quite a turnaround from the year before when the United States had the lowest stocks (112 million bushels) since the 1970s. In 2004, low stocks and fear that the United States would run out of soybeans prior to harvest created the highest soybean prices since 1996-97 and triggered an expansion in Brazilian soybean plantings for 2004-05.

“This year, we're back to a very comfortable stocks-to-use ratio, over 16 percent.”

A struggling meal market does not bode well for sustaining high soybean prices, according to Brugler. New ethanol plants produce distillers dry grains (DDG), a feed. “I have different estimates of how much DDG you get out of a bushel of corn, but one is that out of 56 pounds in a bushel, we kick 18 pounds of DDG out the back end to a feed lot or a dairy farm. It's not being exported.

“It amounts to 12 million tons of DDG a year. A couple of years ago, we were at 4 million tons of DDG. This has replaced approximately 25 percent of U.S. soybean meal use. USDA says by the year 2006, it will replace a third. This is one reason meal has had trouble rallying, and it's affected the price of beans.”

Since 1983-84, the average annual trading range for soybeans has been $2.18 cents a bushel, Brugler noted. Last year was the highest ever, $5.42 — the difference between $10.64 and $5.23. The smallest range was 96 cents in 1985-86.

“If we can establish that $4.98 is the low of the year, we have a very good chance of seeing a dollar rally off that. Part of that may be the shorts buying back the rest of their positions. Part of that may be nervousness about dryness in Brazil. Part of it could be rust. But the rally we've seen the last few weeks is primarily short covering.”

Brugler's analysis appeared to be right on the money, although the trading range continues to stretch. By the first of March, futures had rallied to $6.24.

Brugler anticipates that as much as 2 million U.S. acres could shift out of soybeans because of Asian soybean rust concerns.

Human foibles could play an important role in how the disease impacts the United States, noted Brugler. For example, “a part-time farmer in the Midwest may not spend enough time scouting his fields for rust because he has a part-time job in town. Spray effectiveness is another issue. I know an applicator who has eight new rigs, but if he has to spray all his acreage, it could take 11 days. The fungus could really start to hurt you in three or four days.”

Even if we did lose yield to Asian soybean rust, Brugler said, the first 250 million bushels lost “don't count. We have 440 million bushels in ending stocks and we only need 200,000 million to 220,000 million. Plus we have a big pile of soybeans in the world. We really need to make about 700 million bushels go away in the world to get the price up.

If U.S. losses exceed 250 million bushels, “we could see a rally that could more than cover spray costs.”

Brugler's best guess for soybeans this year is 72.5 million acres planted, an average yield (considering rust damage) of 37.5 bushels and a 2.6 billion bushel crop. “Crush would drop slightly in that environment. Exports, because of the large world supply, are going to be down from where they are this year.

“Carryout under these assumptions would come in at 377 million bushels. With that level of stocks, I have a $4.93 cash average.

“A small trading range of 93 cents could easily get you up into the $5.60 to $5.70 area. If we go with the normal trading range of $2.18, we could have $6.25 beans sometime during the year. The downside risk is $4.50 or less.”


e-mail: erobinson@primediabusiness.com