 
March 7, 2005
SOYBEAN UNCERTAINTY PERSISTS
Most of the attention in the crop markets
continues to be on soybeans. The immediate interest is the
potential size of the current South American crop, but other
significant developments will be important as well.
Forecasts of the size of the Brazilian soybean crop continue
to decline on the basis of dry weather in southern growing
areas. Hardest hit is the state of Rio Grande do Sul. That
area was also affected by dry weather last year, resulting
in a crop of about 200 million bushels. Early forecasts for
this year were for a crop near 340 million bushels. Some forecasts
suggest that production may actually be only about half that
amount. Compared to early forecasts of about 2.37 billion
bushels, forecasts for all of Brazil have declined to 1.95
to 2.1 billion bushels. The 2004 harvest totaled about 1.93
billion bushels. The USDA will release a new forecast for
the 2005 crop on March 10. Many believe that forecast will
still exceed most private forecasts.
There still seems to be large differences of opinion about
the potential size of the South American crop. More northern
growing areas of Brazil, as well as growing areas in Argentina,
have had more favorable weather. The 2004 Argentine crop was
estimated at 1.25 billion bushels and last month the USDA
forecast the 2005 crop at 1.43 billion bushels. Most seem
to think that production potential is still near 1.4 billion
bushels.
Beyond the size of the South American crop, the soybean market
must also deal with the uncertainty about the size of the
2005 U.S. crop. Many analysts are still projecting a decline
in U.S. soybean acreage this year. However, the recent rally
in soybean prices relative to corn prices, has created some
second thoughts about how large the decline might be. In early
February, the ratio of November 2005 soybean futures to December
20056 corn futures was near 2.3. At the close of trade on
March 4, the ratio was near 2.6. The increase in soybean prices
has been enough to offset most, if not all, of the additional
cost of treating for soybean rust. Expectations of a decline
of 2 to 3 million acres in soybean plantings have given way
to forecasts of a one to two million acre decline. The USDA
will reveal the results of the survey of planting intentions
on March 31. However, the market will likely continue to debate
the magnitude of plantings until the June Acreage report is
released.
Even after the acreage question is mostly settled, the soybean
market will have to deal with yield uncertainty. With a decrease
of about two million acres in soybean area and a trend yield
near 40 bushels, the 2005 crop would be near 2.88 billion
bushels. Consumption of U.S. soybeans during the current marketing
year is forecast at about 2.82 billion bushels, resulting
in year-end stocks of 440 million bushels. Assuming that use
exceeds the current projection by 40 million bushels due to
the smaller Brazilian crop, stocks will be near 400 million
bushels. If use grows another 50 million bushels next year
for the same reason, stocks at the end of the 2005-06 marketing
year would be near 370 million bushels. To create a shortage
of U.S. soybeans, then, the combination of smaller production
or increased use for the marketing year ahead needs to differ
by about 200 million bushels from these projections.
The third significant uncertainty centers around Chinese
import demand. For the current marketing year, the USDA projects
Chinese soybean consumption of 1.42 billion bushels with imports
of about 825 million bushels. Those forecasts are 12 percent
and 33 percent large, respectively, than estimates for last
year. From September 1, 2004 through February 24, 2005, the
USDA estimates that China imported 355 million bushels of
U.S. soybeans, accounting for 45 percent of all U.S. exports.
As of February 24, China had also purchased an additional
36 million bushels of U.S. soybeans which had not yet been
shipped. It appears that China will continue to buy U.S. soybeans
a little later into the season than normal due to the uncertainty
about Brazilian production. The larger questions, however,
is the rate of increase in Chinese soybean consumption over
the next several years. If that demand remains strong, total
world consumption will continue to grow.
For the current marketing year, soybean prices did not trade
to the extremely low levels suggested by price behavior in
recent periods of surplus. The lowest cash price to date is
about $.60 to $1.00 higher than experienced during the 1998-99
through 2001-02 marketing year. Similarly, the recent price
increase of more than $1.00 per bushels has been larger than
appears warranted by world supply and demand fundamentals.
The relatively strong performance of soybean prices this year
suggests that responses to acreage, yield, and production
prospects over the next six months could be quite strong.
The late season dryness in Brazil and the quick price response
has provided an unexpected pricing opportunity. Now the question
is whether that pricing opportunity will fade with good crop
prospects in the U.S. or will better pricing opportunities
develop during the spring and summer, or both. The large current
surplus of soybeans suggests that the current rally should
be used to sell additional old crop supplies and at least
get started on selling the 2005 crop.
Issued by Darrel Good
Extension Economist
University of Illinois
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