Urbana, Illinois
June 8, 2009The need to
slow the rate of consumption of soybeans is a well-known fact
and there are a few indications that rationing has begun, but
more confirmation is needed.
"The bottom line is producers will want to be ready to move old
crop soybeans once the market is satisfied that sufficient
rationing has occurred," said Darrel Good, University of
Illinois Extension ag economist.
The important issue for the market is how high prices must be to
maintain a minimum level of stocks going into the 2009 harvest.
"In general, prices will stay high or continue to rise until
there is convincing evidence that the pace of consumption has
slowed sufficiently to maintain at least a pipeline supply of
old crop soybeans," Good said.
Price strength may also be moderated by the fact that September
1 stocks tend to exceed expectations. In 7 of the past 10 years,
stocks have exceeded the USDA's September projection. The
largest difference was last year's 65 million bushels figure,
resulting in a 90 million bushel increase in the estimated size
of the 2007 crop. The change was partially anticipated based on
unusually small estimates of residual use in the first three
quarters of the year.
In its monthly report released in February, the USDA projected
2008-09 year ending stocks at 210 million bushels.
"That projection has been reduced each month since and was at
130 million bushels last month," said Good.
The primary reason for the declining projection is the larger
than expected export demand for U.S. soybeans dues to a
shortfall in the 2009 South American harvest. The USDA currently
estimates that crop at 3.556 billion bushels, 730 million
smaller than the 2008 harvest.
"In addition to the shortfall in the South American crop, export
demand has been bolstered by China's decision to build
inventories of soybeans," Good said.
China is expected to import only 12 million bushels fewer
soybeans this year than imported last year even though
production there was about 75 million bushels larger than in
2007.
As of May 28, the USDA estimated that China had imported 629
million bushels of U.S. soybeans since September 1, 2008. That
is 188 million more than imported in the same period the
previous year. Exports to all destinations during the current
year are projected at 1.24 billion bushels, 240 more than
projected last fall.
"Part of the strength in export demand has been offset by a
slowdown in the pace of domestic crush. The domestic crush
during the first half of the 2008-09 marketing year was 10
percent less than during the previous year. However, the crush
was only 7.4 percent smaller in March and only 4.7 percent
smaller in April. Last month, the USDA reversed the pattern of
lowering the projection of marketing year crush and raised the
projection by 5 million bushels," Good said.
As the projections for year-ending stocks have declined, soybean
and soybean product prices have increased in an attempt to slow
the pace of consumption.
"Since early March, July 2009 soybean futures have increased by
about $3.70 per bushel, while the average cash price in central
Illinois has increased about $3.95 per bushel as the basis
strengthened. Over the same period, soybean meal prices have
increased a bit more (50 percent) than soybean oil prices (40
percent)."
"In addition, the soybean price structure became strongly
inverted, with the premium of July 2009 over November 2009
futures moving from about $.10 to about $2.25. This inversion
provides further motivation for users to postpone use to the
extent possible," Good said.
The market is likely willing to let 2008-09 year-ending stocks
be reduced to a pipeline level as long as prospects favor a
large 2009 U.S. harvest.
"Prospects for a large U.S. soybean crop may have improved
because delayed planting of corn and spring wheat will likely
increase soybean acreage over the USDA's Prospective Plantings
report figures."
"However, yield prospects are obviously uncertain at this point,
with late planting in the east adding to yield risk. Pipeline
supplies are likely near 4 percent of annual consumption. That
would be near 120 million bushels this year. In recent history,
stocks were reduced to a low of 112 million in 2003-04, which
was 4.5 percent of use that year," Good said.
"There is a sufficient lag in the release of consumption data so
that it is hard to confirm that soybean consumption is slowing,"
Good said.
On the export side, there were net cancellations of sales for
the week ended May 28, and the pace of shipments dropped sharply
the past two weeks. The spike in the price of distiller's grain
over the past two weeks (more than the increase in corn prices)
suggests that livestock feeders are pursuing alternatives to
soybean meal. The pace of exports and export sales of meal and
oil are slightly above the pace projected by the USDA.
The USDA will release its estimate of June 1 stocks of soybeans
on June 30, 2009. In addition to ongoing consumption data, this
report may provide some additional insight, in the form of
residual use of soybeans during the third quarter of the year,
about year ending stocks.
"Unusually large or small residual use would suggest that the
2008 crop was incorrectly estimated, with implications for
year-ending stocks. No such evidence was provided by the
September 1, 2008 or March 1, 2009 stock reports and is not
generally expected in the June report," Good said. |
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