Just like an overweight hound, soybeans are having trouble running with the big dogs this year. The bean market is dragging around over two months worth of surplus, and that extra baggage is holding it back. With acreage decisions made, but uncommitted, what are the current dynamics that will affect soybean profitability this year?

US grain bins are holding record stocks of soybeans. South America is harvesting a record soybean crop. World supplies of soybeans and soybean oil are more than sufficient. But Outlook Specialist Darrel Good at the University of Illinois says if soybean prices remain high, the next Brazilian crop may be even 10% larger. US producers have indicated a potential cut of 8.3 million acres this year. And Good says with a trend yield this year, we will still have a 300+ million bushel surplus in August of 2008. He says that will lead to weakness in soybean prices when the market foresees a trend yield later this summer.
Current stocks from the old crop are more than enough. Even though soybean use since last September has been at a record high, the crush rate may slow over time due to high feed prices that have slowed the rate of feeding. Good says the magnitude of the crush during the last half of the year will depend on the domestic and foreign demand for soybean meal. The latest USDA forecast is for an increase in those, but a slowdown in international demand might be expected because of the large South American harvest. It is expected to be 8% bigger than last year. And a slowdown in domestic demand might also occur because of the availability of distillers’ dried grains from ethanol plants.

An estimate of 1.77 billion bushels of soybeans that are crushed for the year produces just over 20 billion pounds of soybean oil. In the first 5 months of the year, domestic consumption was 8% more than last year, and exports were 80% ahead of last year. Domestic demand for soybean oil is well above the trend rate because of biodiesel production. This past February, biodiesel accounted for over 11% of the US soybean oil consumed, including both domestic and foreign. Darrel Good estimates total soybean oil consumption could be 5% more than 2006, and that would put use at 18.85 billion pounds which is over the current USDA estimate. He says that leaves soy oil stocks at 2.7 bil. pounds, which is large, but 266 mil. pounds less than last year.

US soybean exports should be just over 1 bil. bu. about 14% larger than last year. For the first half of the marketing year, they have been more than 22% above last year at this time. The EU has upped its purchases 88% and China has taken over half of the increased sales. Exports are running well ahead of the rate to reach USDA’s projections, but they will slow down when South American beans become available.

Given those numbers, ending stocks on August 31 should be just under 600 million bushels, which is a 19.4% stocks to use ratio. Darrel Good says that implies an average farm price of $5.40. So far, the average price has been about $6.10, and 80% of the crop has been sold. For the rest of the crop, the CBOT is suggesting $7.50 and that would put the marketing year price near $6.40. Darrel says, “High prices are associated with expectations of declining supplies and tighter stocks in the year ahead.”

What about the year ahead? With 67 million acres forecast in the USDA Planting Intentions Report, that would be 11% less than last year. And Darrel Good says, “Substantial changes from March intentions would not be expected unless relative prices change significantly by mid-May or unusual Midwest weather results in a shift in acreage. If 67.14 million acres are planted, harvested acreage near 66.2 million would be expected with a generally favorable growing season.”

With a good growing season a yield of 42+ bushels could be expected, and NOAA has not forecast the development of unusual weather patterns. Harvested acreage of 66 million and a trend yield would provide 2.8 billion bushels. Combined with the carryover, 3.4 billion bushels would be available for the 2007-08 market. Darrel Good says the demand will depend on Chinese needs, US livestock expansion, and increased biodiesel use. Darrel Good says some of the livestock feed demand may be replaced by 8.8 million tons of distillers’ grains from the additional ethanol produced. Regarding biodiesel, demand for soybean oil will increase as long as oil is under 30¢ per pound. The Chinese demand is determined by its livestock industry and obtaining South American soybean meal. He is expecting total consumption at 3.085 billion bushels and 332 million bushels of ending stocks. That would be a 10.8% stocks to use ratio, which Darrel Good says points to a $6.00 average farm price. But he says there has been a $1.00 premium in the market this year, and that may lead to a $7.00 price for the 2007-08 crop. While there is downside weakness to bean prices, Good says it may not be seen until planting issues are more solid. He says there are currently some good pricing opportunities, but those could fade as the season wears on and South America begins to plant a larger crop next year. The South American soybean crop and the US corn crop will be the determinants of future soybean prices. As seen this year, the soybean market had to defend acreage against corn, and that kept prices strong in the face of large supplies. And Good believes bean prices may now be keyed to buying acreage, rather than responding to a given stocks-to-use ratio.

Summary:
Despite burdensome stocks, the soybean market has been stronger than justified by the stocks to use ratio. However, that may be the key to future soybean prices if sufficient acreage has to be reserved in the wake of the corn ethanol dynamic. Demand has been good for the old crop, helped by exports and biodiesel, as well as a large livestock industry. The new crop will have sufficient acreage along with stocks to meet the demand. There are potential weaknesses in soybean prices, but such weakness may not occur until the actual size of the new crop is determined and how many additional acres are planted in South America next fall.