Huge world soybean stocks keeping lid on market

Huge world soybean stocks keeping lid on market

A look at world soybean markets. What would it take to turn the market bullish?

It’s unhappy news but those looking for a quick cure to what’s ailing the soybean market are likely to be disappointed.

“At the end of the 2013 marketing year, we had record-low U.S. ending stocks at 91 million bushels,” said Scott Stiles, Arkansas Extension agriculture economist, at the recent Tri-State Soybean Meeting in Stoneville, Miss. “At the same time, there was a peak demand for corn for ethanol. So, for the past two years we’ve had north of 83 million acres planted here in the United States.

“You may not be aware that in 2015 we had 2.2 million acres of prevented planting soybeans in the United States. We’d have had record soybean acreage if everything had been planted as intended.”

Stiles took it a step further. “If we’d harvested those 2.2 million acres, instead of a projected 465 million bushels carryover, we’d be looking at a figure some 100 million bushels more.”

Following the historic 2012 drought in the Midwest there have been three years in a row of trend yield, or better. The USDA says the 2015 national average yield is 48.3 bushels.

“The odds are beginning to say chances are slim we’ll do it four years in a row. Some weather models show that by the end of next summer the western Corn Belt will begin to see heat and dryness. So, this may be the year that market patience might pay and not being too aggressive on the front end. There may be some marketing opportunities at the end of the summer given what some of the models are saying.”

The USDA’s National Agricultural Statistics Service (NASS) projects that 10 states will have record soybean yields for 2015. “And some of those are big acreage states. Iowa, Illinois and Nebraska all are expected to have average yields of 56 bushels. Minnesota’s average is at 50 bushels. The western Corn Belt had great conditions and yields in 2015.”

Meanwhile, Brazil is working on its fourth year of record production. “So, the supply issue isn’t just here in the United States. Globally, we’re seeing record levels of world ending stocks.”

Demand

What about demand?

“Currently, the USDA has projected record crush of 1.89 million bushels. Those in the trade say that likely won’t stand. I’d dial it down about 25 million bushels to 1.865 million.

“Crush margins have begun to weaken quite a bit for a couple of reasons. The meal prices have really slid. Between July and today, meal futures have dropped about $100 per ton. Another thing is we’re starting to see a backlog of dried distillers grains (DDG) build in the United States. China has launched an anti-dumping investigation. That’s really slowed the movement of U.S. DDGs to China.”

The issue with Argentina bringing more meal to the marketplace over the next few months is also pulling meal prices down, said Stiles.

“The most concerning area of demand is what the USDA will do with exports going forward. Of course, exports are concern regardless of commodity. But this is where I think the biggest adjustments will be made. Some in the trade see the number coming down in a range between 75 million to 100 million bushels lower than USDA’s current figure.

“Exports projections are expected to drop 7 percent year-over-year. But if you dig into the Foreign Ag Service numbers that come out every Thursday, the reality is the export sales are about 11 percent below last year. If we stay on that pace, you could easily pull the export figure down 75 million bushels.”

China’s import demand for soybeans has increased for 12 consecutive years. The nation’s growth pace “has dipped some to around 3 or 4 percent year-over-year. They’re still our largest customer and we’ve sold 61 percent of our soybeans to them. They’re a vital market but our exports are off about 13 percent from a year ago.”

South America

Meanwhile, South America is looking at a fourth consecutive year of record production. “That’s largely driven by Brazil. Of the (South American) 2016 estimate of 6.3 billion bushels, Brazil’s share is projected to be 3.7 billion.”

Even so, “the estimates of Brazil’s crop are getting smaller, not larger. The U.S. agriculture attache in Brazil this week estimated the crop at 98 million metric tons. That’s two million less than the USDA’s current estimate.

“The earliest planted, irrigated soybeans – and the earliest planted in Mato Grosso were in mid-September – are beginning to be harvested. The yields are off 10 to 20 bushels from last year due to heat. They had several days of 100 to 104 degrees in October and November that really took the top off their yields.”

Stiles warned that anything Brazil loses in production could be offset by what the Argentine farmers are about to sell. “They’ve stored up, over the last couple of years, somewhere between 550 million and 590 million bushels. With the devaluation of the peso and the reduction of export taxes in Argentina, it’s anticipated they’ll bring about half of that inventory to the marketplace in the first quarter of (2016).

“The highest U.S. ending stocks in nine years is beginning to put a lot of pressure on prices. The mid-point of USDA’s price range for the 2015 crop is now below $9 at $8.90. Without any severe weather problems, I believe we’ll see below $9 for the 2016 crop.”

The USDA preliminary balance sheet for 2016 shows a slight drop in soybean acreage to about 1.2 million. “They put these estimates together last November based on the balance sheet. There were no adjustments to that balance sheet in December. At that time, though, the economics favored corn a bit more. The point is, we may not see soybean acreage change that much year-to-year … because there’s not a good alternative crop for growers to run to.

“Our window of opportunity for exporting a lot of soybeans is rapidly closing. Our strongest months for export sales are at the start of the marketing year, August 1, through January prior to when the South American harvest hits the pipeline. So, we’re running out of time to turn this ship around. With exports running 11 percent behind last year, it’s becoming increasingly difficult to change.”

Bullet points

Stiles said there are three things that could turn grain prices around.

  • A sharp increase in the value of crude oil.
  • A sharp decline in the U.S. dollar.
  • A significant production cut in South America or the United States.

“Really, there’s only one of the three that has any potential to happen – the weather issue. January and February will have to deliver some bad weather in South America to see a significant production decline. Or, we could see a heat dome develop in the western Corn Belt to see substantial rallies.”

There’s little upside potential for the next four months. “South America will deliver a big crop. I expect May futures to trade below $8, perhaps around $7.50.”

Further complicating the picture “is that funds have record short positions on soybeans. The movement of money can create some temporary spikes in prices. When you’ll see that isn’t just at the end of months but is more pronounced at the end of quarters. Lots of times when funds liquidate you’ll see the spikes. But they aren’t lasting run-ups in the market. You have to be watching closely to take advantage of funds exiting short positions. 

“Besides using budgets and knowing your cost of production, I recommend using charts. You can use charts on www.barchart.com to make sense of your marketing.”

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