Soybean producers, that hot breath on the back of your neck is a bear's. As of Jan. 19, March soybean futures had dropped another 5.5 cents and Scott Stiles said the rough treatment was likely to continue.
“I wish we could have done this (talk) three weeks ago,” Stiles, Arkansas Extension economist, said at the Arkansas Seed Growers Association annual meeting in Brinkley, Ark. “There would have been a little better news to talk about in the soybean market.”
The prevailing belief is most private analysts “made their final sales around mid-December. The bulk are now saying, ‘If you haven't gotten rid of your old crop, now's the time.’”
It appears the March contract will work lower. “It's been down eight of the last nine trading days and lost 66.5 cents — about 10.5 percent of its value.” November numbers don't look much different, said Stiles. Those too, had been down eight out of the last nine days.
“You can see that even before the latest USDA numbers came out (on Jan. 12), much of the speculative money in the market was leaving. Traders were positioning themselves and lots of private estimates were coming out about how much bigger the crop would get and pointed to how sluggish exports were. So a lot of bad news about soybean fundamentals was hitting the market even before Jan. 12.”
The latest USDA report was decidedly bearish on both the supply and demand side. Production increased with the 2005 crop growing while exports sales have slowed.
“When we decrease demand and increase supply that leads to a building of ending stocks. Another point that can be added to this is the world's ending stocks increased as well.”
In 2005, “USDA said we harvested a bit over 71 million acres of soybeans. That's down about 2.5 million acres from 2004. While acreage in the country is down a tad, we had better yield. Nationwide, the average yield is 43.3 bushels per acre. That's about 1 bushel better than in 2004.”
Arkansas soybean producers may wonder where “all these fantastic yields came from. Arkansas' yield was down about 13 percent from a near 40-bushel average in 2004 to about 34 bushels in 2005. Missouri was also down quite a bit.”
But six states had record yields in 2005. Four of those states have significant acreage: Nebraska, Iowa, Minnesota and, to a lesser degree, North Dakota. Average yields in Nebraska, Iowa and Minnesota were near 50 bushels.
“In the middle of last summer, we kept hearing the Illinois crop would be way off and was in jeopardy. Still, they came up with a 47-bushel average. Next door, Indiana had a 49-bushel average.”
The soybean acreage from Iowa, Nebraska, Minnesota, Illinois and Indiana is “51 percent of the country's total harvested acreage. And those five states had a 48- to 49-bushel yield collectively. That means we've produced back-to-back 3 billion-bushel soybean crops and that's had a huge impact on ending stocks.”
Another fundamental factor hurting the market is exports. A year ago, the United States exported 1.1 billion bushels of soybeans. Currently, it appears the nation might ship out 950 million bushels.
“But it's very hard to find a private analyst willing to say we'll export 950 million. The consensus among many seems to have exports topping out at 925 million bushels. Unless things pick up very quickly, it'll be hard for us to export 950 million bushels.”
Prior to the Jan. 12 report, most analysts thought ending stocks would be 50 million bushels. Everyone knew the crop would be bigger, but not this big. Instead of ending stocks going up 50 million bushels, they doubled that.
“Ending stocks are now almost 100 percent higher than they were a year ago. They're also 4.5 times higher than they were two years ago.”
In his career with Arkansas Extension, Stiles has been to a lot of county meetings and done many market outlook talks. He's rarely gotten applause after a county production presentation. But he did on Jan. 16, 2004, at the Weiner Rice Festival.
“That's when I predicted that if you had any old crop beans left you should hang on to them. The stars had lined up and we were headed to $10 beans. Two years ago the March 2004 contract was trading at $8.41. We're a long way from there now.”
At that time, the country hadn't seen such low ending stocks since 1976. “Now, we're looking at the second-highest ending stock level we've seen.
“Let me be brutally honest. Assuming fertilizer prices don't creep down, we may have 2 million additional acres of soybeans in 2006. That would get us back to the acreage we've been at over the last several years. Most estimates say we'll have from 1 million to 3 million new acres. If that happens, it's obvious we're unlikely to see November futures return to $6.”
In reality, new crop futures will most likely be around $5. “Some are saying we may even see cash prices with a ‘4’ in front. I hope that doesn't happen, but the private analysts are telling people to be aggressive, to consider forward contracting 30 percent of their production. If you've done some booking around $6, you may have the opportunity to improve on that since we may be looking at huge LDPs by the end of the 2006 crop.”
Price recovery keys
So what are keys to recovery in 2006?
First, to meet USDA estimates, from now until the end of the marketing year the United States needs to move nearly 16 million bushels of soybeans a week. Unfortunately, current sales are dismal compared to a year ago.
“If you look at cumulative sales through the end of January, they're about 130 million bushels short of a year ago — down about 25 percent. There are many factors behind that — from South American competition to avian flu.”
Worldwide, there are many concerns about feed demand associated with avian flu. “There's a lot of perception about the impact of that. In France, reports are that poultry consumption is down 20 percent simply due to avian flu fears. That impacts feed demand.”
Business with China has been brisk lately. “We sold them 110,000 metric tons of soybeans on (Jan. 17). That's tagged onto to several cargoes a week earlier. However, they're saying their demands may be met through February and they're waiting for the South American crop to come off.”
The Chinese decision to wait shows how much competition Brazil and Argentina (forecast to export 1.3 billion bushels between them) now pose for the United States.
“Brazil and Argentina will have nearly 91 million acres of soybeans in 2006. Their production will be about 600 million bushels more than the crop we just produced. That's been a factor in the market.”
Argentina received good rains in mid-January. “They had about 85 percent coverage in some key growing areas. In Brazil, there are some states that are very dry and forecast to remain so. Soybeans there are in a critical position with just over 60 percent of the crop at bloom. The bulk of their harvest will come in March and beyond.”
And then there is Asian soybean rust (ASR) to worry about. In 2005, there were 138 positive ASR detections over nine states. “If you go back to the November contract in 2005, I think ASR played a part in the $1.50-per-bushel price rise. There was a phrase termed ‘rust premium,’ and I believe it had a psychological impact on the market. The crop was in jeopardy in Illinois, but I think how much rust was detected before the end of August (51 confirmed detections) was a factor.”
In 2006, U.S. soybeans will see ASR, said Stiles. “Since January, it's already been found in nine locations in Florida and one in Alabama. How big an impact it will have on price depends on how far north it migrates.”
To illustrate the potential weather problems generated by the La Niña effect, Stiles showed a map of sea surface temperatures. Off the west coast of South America water is a little cooler than average, contributing to the La Niŕa.
“Generally, a La Niŕa translates to a Midwest/Corn Belt drought situation. It also can hit the Southern Plains. That's significant when you consider we're already in a drought. The drought monitor currently shows there's moderate to extreme drought already over northern Illinois and Iowa. There's also ‘exceptional’ drought in parts of Oklahoma and Texas.”
Without major rainfall between now and planting, subsoil moisture won't be available to the 2006 crop. If La Niña shows up, “yields will definitely suffer.”