With the wheat crop heading into the home stretch and the corn crop planted and growing (in most places) the biggest commodity question mark this year is soybeans. Planting is two-thirds finished, but the size of the potential crop is the unknown factor and the volatile markets confirm the lack of anyone having a good grasp on the 2007 soybean crop.

For the benefit of the soybean grower, let’s visit with some authorities who have a clear perspective of the soybean market. Several weeks ago, Extension Outlook Specialist Darrel Good at the University of Illinois rhetorically asked if soybeans had established their marketing year high, and noted that February highs had not previously occurred. Last Friday, the cash market added 20 cents above the February high, and the 2008 and 2009 November contracts established new highs, with the 2007 new crop contract only a penny under the February high.

All of this is occurring as planting progresses with a record carryover expected at the end of August. And University of Missouri Outlook Specialist Melvin Brees acknowledges the irony of it all, saying, “The soybean market continues to confound many market analysts. Large crops in South America and record 2006-07 US ending soybean stocks, along with the potential for increased acreage (producers are expected to plant soybeans on failed wheat acres and corn acres that may not get planted), would ap- pear to be negative news for soybean prices. However, after slipping nearly 80 cents per bushel from price highs in February to lows in April, new crop soybean futures prices have rallied and are again above $8.00!”

While futures prices are high from the speculative demand, cash prices are unusually low because of the wide basis. Darrel Good says, “The combination of that speculative demand and large current inventories of soybeans have kept basis generally weak. The average central Illinois cash bid was $.42 under July 2007 futures on May 25. That is about $.07 weaker than the very weak basis of a year ago and about $.35 weaker than the typical basis for this time of year.” Allen May at South Dakota State University labels the basis as “horrendous,” and is not very optimistic about a turnaround anytime soon, “There is little one can say about the wide basis except that the wide basis for both old and new crop beans puts the current basis in a territory we have not seen in past history. Unless we see a noticeable change in fundamentals of lower production and decreasing carryover domestic and worldwide supplies, there appears to be little indication at the present time of basis getting significantly better any time soon.”

In fact, Purdue University Outlook Specialist Chris Hurt says many of your neighbors are waiting to unload beans in the next month or so, “Some producers are going to hold on to those stocks awaiting the defining weather of July-maybe even August. This means there is a higher likelihood that prices will drop rapidly after early-July if weather threats have not arisen by that time.”

So the cat is out of the bag on the basis, which is due to a large carryout with adequate supplies of beans available whenever a crusher wants to buy them. But what is the reason for the speculative demand driving the futures market skyward? Missouri’s Brees sums up the reasons as, “Fund buying, growing biodiesel demand, a weaker dollar supporting exports and reduced 2007 planted acreage are among some of the reasons for strength in soybean prices.” And he says the bidding for 2008 soybean acreage may have already begun, “Although soybean supplies are expected to be more than adequate for 2007-08, use cannot continue to exceed production by this amount. Soybean prices will need to bid for acres in 2008. This may already have begun as some analysts point out that the current rally in soybean prices is bringing the soybean/corn price ratio back to more normal levels compared with last winter’s price ratios that greatly favored corn.” And he says to keep in mind that summer weather has not yet impacted the bean market.

Soybeans, as you know, are priced on their oil and meal value, and prices for soybean oil and soybean meal have been strong in May for various reasons, says Darrel Good at Illinois. “July 2007 soybean oil futures increased about $.03 per pound while July 2007 soybean meal futures increased about $20 per ton. Soybean meal prices reversed the lower trend that started in late February, while soybean oil prices continued the upward trend that began in early November 2006.”

Although we’ll have 600 million bushels of unused beans at the end of the current marketing year, the market is concerned about a diminished carryover a year from this August, and is apparently ensuring sufficient acreage is planted for 2007 production. Remember that USDA’s Planting Intentions report forecast 68 million acres, some of the outlook specialists believe that could expand. At Kansas State University, Outlook Specialist Mike Woolverton told a radio program, “There is a lot of corn that did not get planted or replanted, and those acres will go into beans, and many of the frozen wheat acres will be planted to beans, possibly more than USDA expects.” Iowa State Outlook Specialist Bob Wisner agrees that bean acres will surpass the current projection, “We have increased planted soybean acres by 1.4 million acres from the March 1 intentions and have increased the U.S. average yield by 0.5 bushels per acre from current USDA projections. At that level, the U.S. yield would still be 0.7 bushels per acre below last year and 1.0 bushels per acre below the 2005 yield. With this combination, U.S. soybean stocks would tighten considerably vs. this year by August 31, 2008. However, they would still be a fully adequate 7 weeks supply.”

With futures prices high, the basis wide, and a potential market decline in the summer, how do you begin to manage price risk? Darrel Good says there are still some factors that will determine prices, “In addition to prospects for the 2007 U.S. crop, soybean prices will be influenced by planting decisions in South America later this year. Higher fertilizer prices and a weak U.S. dollar make soybeans less attractive in Brazil. Still, at current futures prices a substantial increase in soybean acreage in South America can be anticipated this year. The market appears to be offering an early opportunity to price a portion of the 2007 crop.”
Purdue’s Hurt says with the recent advance in soybean prices, producers should not wait too long to plan sales, based on what he sees ahead, “This means continuing to clean up old crop sales except for bushels you are willing to store into the summer for a possible weather rally. Given normal yields this summer, I would expect harvest prices to be near $6.50 to $6.75 this fall.” And he draws complete agreement from Allen May at South Dakota State, “One cannot necessarily look at the prospect of $7.40-$7.50 new crop beans and turn one’s nose up at that kind of price. Be prepared to take advantage of possible continued upturns by having a marketing plan in place so you’ll be ready to pull the trigger on new crop beans when your price target is reached.”

Summary:
Whether you are in the field planting beans, spraying corn, or something else, Extension’s market specialists are all in agreement with their analysis of the soybean market: More beans may be planted than expected, but the acreage is still unknown. The futures market is driven by speculative demand for biodiesel, fund buying, and a weaker dollar. However, cash prices are disproportionately low because of large stocks that are quickly available to processors. Once the crop size is known and there is a lack of weather threat to the crop, soybean prices are expected to rapidly drop. Soybeans in the $7 range should provide profit opportunities.