SOYBEANS: AN EARLY WEATHER MARKET

Transcription

1 SOYBEANS: AN EARLY WEATHER MARKET January 2000 Darrel Good Summary 1999 U.S. Crop Estimate Revised Lower Soybean prices have made a modest rally from the mid-december lows, fueled by areas of dry weather in South American soybean producing regions and by a smaller estimate of the 1999 U.S. harvest. While year ending stocks in the U.S. are expected to be large, a smaller South American harvest could increase the world demand for U.S. soybeans and reduce those stocks to more manageable levels. Based on current price and loan rate relationships, soybean acreage is expected to expand in the U.S. again this year. Even so, persistent dry weather into the planting season would raise concerns about average yields and total production. While it is very early to make sound weather and production forecasts, it appears that U.S. world soybean stocks may be declining over the next year or so. Such a situation opens the door for higher prices. Cash prices, however, may remain below the loan rate for now. A move above that rate will require further reduction in the size of the South American crop and/or continued concern about the 2000 U.S. growing season. The initial target for the current rally is about the $5.50 area basis July 2000 futures. In the annual Crop Production report, released on January 12, the USDA estimated the size of the 1999 soybean crop at billion bushels. That estimate is 30 million bushels below the November estimate and 98 million smaller than the record large 1998 harvest. It is also 227 million smaller than the initial estimate of the 1999 crop released in August 1999 (Table 1). The U.S. average soybean yield was estimated at 36.5 bushels per acre, 0.2 bushels below the November estimate and 2.4 bushels below the 1998 average (Table 2). The U.S. average yield was below trend line value for the first time in four year. The estimate of planted and harvested acreage was also reduced marginally. Harvested acreage, however, was still record large, at million acres, million more than harvested last year (Table 3). For the seven largest soybean producing states, production in 1999 exceeded that of 1998 only in Nebraska and South Dakota. The largest decline was in Missouri, where the state average yield declined 6.5 bushels. December 1, 1999 stocks of soybeans were estimated at billion bushels, almost identical to the inventory of a year earlier (Table 4). While at the second highest level for that date, December 1 stocks were a little smaller than expected.

2 Consumption Expected to Increase Based on the December 1 stocks estimate and the revised production estimate, about 812 million bushels of soybeans were used during the first quarter of the marketing year (Table 4). That is about 40 million more than consumed in the first quarter last year, but 14 million below the record use of two years ago. The first quarter domestic crush was a record million bushels and exports were the second largest for the quarter. As of January 20, 20 weeks into the marketing year, the USDA reported that 482 million bushels of soybeans had been inspected for export. That is about 10 percent above last year s accumulated inspections. A year ago, the inspection figures exceeded exports reported by the Census Bureau and that appears to be happening again this year. In September, October, and November 1999, inspection figure exceeded Census Bureau figures by nearly 12 million bushels, or about 4 percent. That is not quite as large as the 7 percent discrepancy for the same period last year. As of January 13, 159 million bushels of soybean has been sold for export but not yet shipped, about 4 percent larger than outstanding sales on the same date last year. Total accumulated exports and export sales as of January 13 were about 10 percent larger than on the same date last year. The increase was mostly due to larger sales to Mexico and China. Sales to the largest buyer, the European Union, were down about 2 percent. For the year, the USDA projects U.S. exports at 865 million bushels, about 8 percent more than shipped last year. The current pace, then, is slightly ahead of target to meet that projection. One of the major influences on U.S. exports during the last quarter of the marketing year will be size of the South American harvest. The USDA currently projects that harvest at billion bushels, slightly smaller than last year s crop of 1.98 billion bushels. The decline is projected to come in Argentina (Table 5). Less than ideal weather in parts of Brazil, however, suggests that the crop there may also be smaller than the current projection. We are using an estimate of 1.9 billion bushels for the South American harvest and an export projection of 880 million bushels (Table 6). The domestic crush of soybeans during the first quarter of the marketing year totaled a record million bushels, 4 percent more than during the same quarter last year (Table 4). The domestic crush has been driven by soybean meal demand. Soybean oil exports are running well behind the pace of a year ago. For the first two months of the marketing year, the Census Bureau reported soybean meal exports of million tons, 10.5 percent more than during the same two months last year. As of January 13, commercial meal exports for the year stood at million tons, about equal to shipments of a year ago. Unshipped sales, however, stood at only million tons, 24 percent less than on the same date last year. For the year, the USDA projects meal exports at 7.1 million tons, marginally lower than last year s shipments. If the South American soybean crop is smaller than currently projected, U.S. meal exports could exceed that projection. In addition to having smaller exportable supplies, South America may feed more meal due to a smaller corn crop, particularly in Brazil. We are projecting U.S. meal exports at 7.3 million tons (Table 7). 2

3 Domestic meal consumption was up sharply (6 percent) during the marketing year due to increased livestock and poultry numbers and low meal prices. Hog and cattle numbers are expected to decline as this year proceeds, suggesting a more modest increase in meal consumption, particularly as meal prices have increased. The USDA projects a 1.6 percent increase. With higher livestock prices likely to offset higher feed prices, that magnitude of increase appears small. An increase of 2.5 percent seems more likely, putting domestic use at million tons for the year (Table 7). Based on these projection of use, imports of 50,000 tons, a 90,000 ton reduction in year ending stocks, and an average meal yield of 47.5 pounds per bushel of soybeans, the domestic crush for the current marketing year should be near billion bushels (Table 6). That is 20 million larger than the current USDA projection. If billion bushels of soybeans are crushed this year, about billion pounds of oil will be produced, assuming an average oil yield near last year s average of 11.3 pounds. (The average for September, October, and November was nearly identical to that of last year.) Soybean oil exports for the first two months of the marketing year totaled 325 million pounds, 39 percent less than during the same period last year. Through January 13, commercial oil shipments were 67 percent smaller than shipments of a year ago and outstanding sales were off 64 percent. For the current marketing year, the USDA projects soybean oil exports at 1.75 billion pounds, 26 percent less than exports during the past year (Table 8). One of the reasons for the decline is the abundance of other oilseed crops and a large palm oil crop. Oilseed production outside of the United States is projected at a record million tons, 2.5 percent larger than last year s output in spite of a 3 percent decline in soybean production (Table 9). Domestic soybean oil consumption is projected by the USDA at 15.8 billion pounds, only 1 percent above last year s consumption. With persistent low prices, use could be more in line with the long term trend increase of 2 percent, putting the domestic total at billion pounds (Table 8). Based on these projections, soybean oil will remain in surplus. Year ending stocks are projected at record 2.25 billion pounds. Prospects for the 2000 Crop Planted acreage of soybeans in the U.S. has increased significantly in the 1990s. Acreage grew from million acres in 1987 to 64.2 million in The high soybean prices of 1997 propelled acreage to 70 million, while the relatively high loan rate for soybeans pushed acreage to a record million in 1999 (Table 3). Planted acreage in 2000 will depend on a number of factors. The most important will be the price of soybeans or the soybean loan rate, whichever is higher, relative to the price of feed grains. Planting season weather and the amount of land accepted in the Conservation Reserve Program (CRP) will also influence soybean acreage. The decline in winter wheat seedings means more land, about 500,000 acres, is available for spring planted crops or for the CRP. Failure of the winter wheat crop in some areas followed by adequate spring moisture would also allow an increase in spring planted crops. We are assuming that there will be no change in the soybean loan rate for the 2000 crop. While the formula for establishing the loan 3

4 rate would allow for a modest decline in the loan rate, such a change would not alter the advantage of the soybean loan rate relative to the feed grains and wheat loan rates and might have little impact on planting decisions. On the other hand, a lower loan rate would reduce potential loan deficiency payments which is not an attractive alternative. As of January 25, November 2000 soybean futures were trading at about $5.40. That is equivalent to a cash price of about $5.15 for harvest delivery in central Illinois, or about $.30 under the loan rate. The cash corn price for harvest delivery in central Illinois was about $2.30. The ratio of the soybean loan rate to the cash price of corn was about 2.37 to 1. That ratio is about breakeven for corn and soybean production under average cost and yield situations. Under current conditions, a small increase in soybean acreage would be expected in If harvested acreage increased by about 500,000, to a total of 73 million, and the national average yield was near the trend value of 39 bushels, the crop would exceed 2.8 billion bushels. Such a crop would result in another large increase in stocks next year. With a market for 2.65 billion bushels of soybeans, the 2000 yield would have to decline below 34.2 bushels to bring marketing year carryover stocks under 200 million bushels. Price Prospects Average monthly prices of soybeans and soybean meal for the marketing year to date have been as follows: Month Soybeans 3 Meal 3 Soybean Sept Soybean Oil 4 $/bu $/ton /lb Oct $ Nov Dec Jan Ave. $4.56 $ Through Jan. 24; 2 Central Illinois; 3 44% protein, Decatur, IL; 4 Bulk, Decatur, IL The range of cash prices in central Illinois so far this marketing year has been from $4.35 (October 26) to $4.935 (September 7). By late January, the cash price was approaching the September high. For the past 20 years, the range in the central Illinois cash price during the 12-month marketing year has been as small as $.615 ( ) to as high as $5.03 ( ). The range of $.585 so far this year is likely to be exceeded. For now it appears that the range will be extended by higher cash prices. The range has been less than $1.00 only 2 times in the past 26 years ( and ). The range for the past five years has varied from $1.345 to $2.33, averaging $2.03 per bushel. The progress of the 2000 crop will dictate how high or low prices go during the remainder of the marketing year. The risk of sharply lower prices will not likely surface until, or if, a large 2000 crop materializes. Prices appear to be on the verge of breaking out of the sideways pattern that has been in place for the past year. For the year, we project the average price of soybean meal (44 percent) at $ per ton. That 4

5 implies that the average for February through August will be about $166 per ton, nearly $20 above the average for the first 4 months of the year. The average price of soybean oil is projected at 16 cents per pound, which implies an average for the next 8 months near cents per pound. Product prices at this level suggest an average soybean price of $4.85 per bushel. To reach that average for the year, the average for the next 7 months would have to be $5.05 per bushel. Marketing Strategies As always, there is a fair amount of uncertainty about supply, demand, and prices for the year ahead. The recent price rally is encouraging. For the first time in about 18 months there is more than one factor supporting prices. For now, the rally has not carried prices above the loan rate. Futures prices through November 2001 still reflect cash prices below the loan rate. For old crop soybeans which are still eligible for loan benefits, the most attractive strategy is to get the crop under the loan and to lock-in the loan repayment rate for 60 days. Higher prices, then, would result in higher net prices (that is higher prices would not be offset by a smaller loan deficiency payment) and would mean that loans could be paid off interest free if prices go above the loan rate in that 60 day window. If prices fail to rally in the 60 day window, then the loan could be repaid at the prevalent posted county price anytime before the loan expires (after the end of the 60 days). For old crop soybeans for which a loan deficiency payment has already been established, decisions are more complicated. A scale-up strategy over the next 4 to 5 months might be considered. Options offer downside price protection, but at-the-money July option premiums have increased to about $.35 per bushel. Simply buying put options, or replacing inventory with call options, does not look attractive at those prices. That type of transaction could be augmented by selling out-of-the money call options to reduce the net cost of the option protection. July $6.25 call options, for example, could be sold for about $.12, reducing the net cost of price protection to about $.23 plus commission fees. Such a strategy, however, does cap the gain from higher prices. With new crop prices still below the loan rate, no action is required at this time. Rallies above the loan rate will require decisions. A scale-up strategy on the first portion of new crop sales might be considered starting at about $6.00, basis November futures. Issued by Darrel Good Extension Economist University of Illinois 5

6 Table 1. United States Soybean Production Estimates million bushels August 1 2,130 1,880 2,017 2,293 1,843 2,035 1,959 1,979 2,000 1,474 1,905 1,836 1,869 2,079 1,902 2,282 2,246 2,300 2,744 2,727 2,870 September 1 2,174 1,831 2,089 2,314 1,535 2,028 2,063 1,980 1,957 1,472 1,889 1,835 1,817 2,085 1,909 2,316 2,285 2,270 2,746 2,909 2,778 October 1 2,213 1,757 2,107 2,300 1,517 1,972 2,108 1,992 1,968 1,501 1,926 1,823 1,934 2,108 1,891 2,458 2,190 2,346 2,722 2,769 2,696 November 1 2,236 1,775 2,077 2,300 1,535 1,902 2,129 2,009 1,960 1,512 1,937 1,904 1,962 2,167 1,834 2,523 2,183 2,403 2,736 2,763 2,673 January 1 2,268 1,817 2,030 2,277 1,595 1,861 2,099 2,007 1,905 1,539 1,927 1,922 1,986 2,197 1,809 2,558 2,152 2,382 2,727 2,757 2,643 FINAL 2,261 1,798 1,989 2,190 1,636 1,861 2,099 1,943 1,938 1,549 1,924 1,926 1,987 2,190 1,870 2,515 2,174 2,380 2,689 2,741

7 Table 2. United States Soybean Yield Estimates million bushels August September October November January FINAL

8 Table 3. Soybean Planting Intentions, Actual Plantings, and Acres Harvested Year January Intentions Mar./April Intentions June/July Intentions Actual Harvested Acreage million acres a a 65.8 b a a a February 1 b May 1

9 Table 4. Soybean Quarterly Balance Sheet million pounds September 1 stocks Production 2, , , , , , , , , , , , , , , , , ,642.9 TOTAL 2, , , , , , , , , , , , , , , , , ,994.4 September-November Crush Export Seed, residual TOTAL December 1 stocks 1, , , , , , , , , , , , , , , , , ,182.2 Crush Export Seed, residual TOTAL March 1 stocks 1, , , , , , , , , , , , , , ,457.3 Crush Export Seed, residual TOTAL June 1 stocks Crush Export Seed, residual TOTAL September 1 stocks Annual Crush 1, , , , , , , , , , , , , , , ,589.7 Export Seed, residual TOTAL 2, , , , , , , , , , , , , , , , ,595.3

10 Table 5. Soybean Production by Country Year United States Brazil a Argentina a Paraguay a China Other World All Foreign million bushels , , , , , , , , , , , , , , , , , , , , , ,975 1, , ,162 1, , ,437 1, , ,056 1, , ,421 1, , ,565 1, , ,601 1, , ,812 1, , ,506 1, , ,945 2, , ,826 1, , ,946 1, , ,308 2, , ,318 2, , ,057 2, , ,591 2, ,380 1, ,857 2, ,689 1, ,809 3, ,741 1, ,840 3, ,643 1, ,649 3,006 a Harvested in the spring of the following year.

11 Table 6. Soybean Balance Sheet -- Years Beginning September a million bushels Carryin Production 1,924 1,926 1,987 2,190 1,870 2,515 2,174 2,380 2,689 2,741 2,643 TOTAL b 2,109 2,167 2,320 2,470 2,168 2,729 2,514 2,573 2,826 2,944 2,994 Crush 1,146 1,187 1,254 1,279 1,276 1,405 1,369 1,436 1,597 1,590 1,625 Export Seed, feed, residual TOTAL 1,870 1,838 2,041 2,178 1,954 2,394 2,331 2,441 2,626 2,597 2,665 Carryout U.S. Average price $5.70 $5.75 $5.58 $5.60 $6.40 $5.48 $6.77 $7.35 $6.47 $4.93 $4.85 a Projected b Includes Imports

12 Table 7. Soybean Meal Balance Sheet -- Years Beginning October c thousand tons Beginning stocks Production 27,719 28,325 29,831 30,364 30,514 33,270 32,527 34,210 38,176 37,792 38,590 TOTAL a 27,982 28,688 30,183 30,687 30,788 33,483 32,825 34,524 38,443 38,109 38,970 Domestic 22,291 22,934 23,007 24,251 25,283 26,542 26,611 27,320 28,895 30,662 31,430 Exports 5,319 5,469 6,946 6,232 5,356 6,717 6,002 6,994 9,330 7,117 7,300 TOTAL 27,610 28,403 29,953 30,483 30,639 33,260 32,613 34,314 38,225 37,779 38,730 Ending stocks Price b $ $ $ $ $ $ $ $ $ $ $ a Includes imports b Bulk, Decatur, Illinois 44% c Projected

13 Table 8. Soybean Oil Balance Sheet -- Years Beginning October c million pounds Beginning stocks 1,715 1,305 1,786 2,239 1,555 1,103 1,137 2,015 1,520 1,382 1,520 Production 13,003 13,406 14,346 13,778 13,951 15,613 15,240 15,752 18,143 18,081 18,370 TOTAL a 14,740 14,728 16,132 16,027 15,574 16,733 16,472 17,821 19,724 19,546 19,970 Domestic 12,082 12,163 12,246 13,053 12,941 12,916 13,465 14,263 15,264 15,655 15,970 Exports 1, ,647 1,419 1,529 2, ,037 3,077 2,372 1,750 TOTAL 13,435 12,942 13,893 14,472 14,471 15,596 14,457 16,300 18,341 28,027 17,720 Ending stocks 1,305 1,786 2,239 1,555 1,103 1,137 2,015 1,520 1,382 1,520 2,250 Average Price b a Includes imports b Bulk, Decatur, Illinois 44% c Projected

14 Table 9. World Oilseed and Soybean Production Major Oilseeds Soybeans Year United States Ex-United Stated Total United States Ex-United States Total million metric tons WASDE January 12, 2000 and earlier.