 
February 21, 2005
BRAZIL'S SOYBEAN CROP - A REPEAT OF 2004?
As mentioned in the last issue, the recent
rally in soybean prices has been stimulated, in part, by some
late season concerns about the size of the Brazilian soybean
crop. It is somewhat reminiscent of last year, when that crop
was affected by late season dry weather.
In January 2004, the USDA judged Brazilian soybean production
at 2.205 billion bushels, above, most forecasts from Brazilian
agencies. That forecast increased to 2.24 billion bushels
in February, but declined each month from March through June.
The final estimate was for a crop of 1.933 billion bushels,
nearly 14 percent smaller than the February forecast. The
forecast size of the Argentine crop declined from 1.34 billion
bushels in March 2004 top 1.25 billion in May, a drop of 7
percent. The large decline in the prospective size of the
South American crop last year came on the heels of a very
small crop in the U.S. in 2003 and contributed to the high
prices experienced last spring.
For the 2005 harvest in Brazil, the USDA had a forecast of
2.37 billion bushels in January, slightly higher than the
forecasts from most other sources. The USDA forecast declined
to 2.315 billion bushels earlier this month, still higher
than most other forecasts. Official forecasts from Brazil
have been for a crop of about 2.24 billion bushels, still
16 percent larger than last year's harvest. Some private forecasts
dropped sharply last week, with some talk of a crop as small
as 2.02 billion bushels. For Argentina, the USDA has maintained
a forecast of 1.433 billion bushels, about 15 percent larger
than last year's harvest. Reports of crop conditions in Argentina
continue to reveal prospects of a large crop.
The price impact of a shortfall in South American soybean
production this year will be moderated by large supplies in
the U.S. Stocks of soybeans on December 1, 2004 totaled 2.305
billion bushels, 616 million (36.5 percent) larger than inventories
on December 1, 2003. Importantly, 80 percent of the year-over-year
increase was in on-farm stocks of soybeans. The large increase
supports the argument that producers have been slow to sell
the 2004 crop. As a result, the futures market has been inverted
much of the year and the cash basis has been extremely strong
in most markets. Both of these developments are contrary to
expectations for the price structure during a period of large
surpluses. The corn market price structure, with a generally
weak basis and large carry in the futures market, is more
typical. While a slow sales pace by producers has supported
cash soybean prices, it appears that there may be large quantities
to move off the farm before the 2005 harvest.
The upside potential for a soybean price rally is also difficult
to judge because prices did not previously decline to the
extremely low levels expected from the large 2004 crop. The
current price rally resulting from Brazilian crop concerns
is exactly what should be expected if prices had already fully
reflected the large surplus. However, if prices had not yet
fully reflected the extent of the surplus, the response to
crop concerns may be more muted. That is, confidence in a
rally starting from $4.25 would be greater than a rally starting
from $5.00.
The current fundamental face off between large current stocks
and Brazilian crop concerns is occurring with the backdrop
of an expected decline in U.S. soybean acreage in 2005. The
USDA's baseline projections show a gradual decline in U.S.
acreage over the next few years as planted acreage of other
crops, primarily corn, increases. A modest increase in acreage
in the Conservation Reserve Program is also anticipated. For
2005, the first look at possible acreage will come with the
USDA's March 31 Prospective Plantings report. In addition
to potential changes in acreage, the soybean market will have
to work through the annual unfolding of weather and crop conditions,
including the potential of soybean rust.
So, what to do? First, establish reasonable price targets
for selling additional quantities of old and new crop soybeans.
Those targets are difficult to establish given all the uncertainty
surrounding price prospects. Price expectations should probably
be tempered by the current large surplus of soybeans in the
U.S. Those stocks will provide some buffer for any shortfall
in South American or U.S. production in 2005. There is still
downside price risk. Limited damage to the South American
crop and a favorable U.S. growing season could result in lower
prices by late summer, with considerable pressure on basis
levels. Second, carefully select crop or revenue insurance
coverage, recognizing that there may be additional production
and price risk in 2005 and that base price levels for revenue
products are much lower than last year. Third, consider the
prudent use of options as a way to manage the risk of large
pre-harvest sales.
Issued by Darrel Good
Extension Economist
University of Illinois
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