Tightening world soybean supplies and lower-than-expected U.S. planting intentions have the soybean market working hard to buy more acreage and ration old-crop supplies. It may now take evidence of larger plantings or a significant slowdown in demand to put another major top in the market.
The March 1 soybean plantings intention figure released by USDA last Friday put the soybean market between a rock and a hard place as it dashed hopes that larger U.S. production might offset South American crop losses.
U.S. soybean planting intentions of 73.9 million acres were down 1.1 million from last year’s actual plantings and USDA’s preliminary estimate of 2012 plantings. The intentions were also below trade estimates that averaged 75.40 million acres in a range from 74.0 million to 76.7 million.
With soybean plantings of 73.9 million acres and a trend-line yield, the U.S. soybean carryout will quickly drop back to the tight levels seen in 2008-2009 and 2009-2010 if the initial 2012-2013 soybean demand estimates released by USDA at its annual Agricultural Outlook Forum in February are in the ballpark.
With supplies already set to tighten that much, the market can ill afford any crop problems. A drop in the U.S. yield of even 1 bu./acre below the trend-line level of 43.9 bu. could lead to major supply squeezes. Given a trend-line yield, it would take soybean plantings of about 77.0 million acres for U.S. production to offset demand at the level USDA forecast in February.
USDA forecast a strong 10.8% jump in U.S. soybean usage, mostly due to a surge in projected exports, which are seen jumping 21.6% to a record 1.550 billion bushels as buyers are forced to turn to the U.S. due to short South American production.
Of course, soybean prices are already much higher than USDA has forecast and as the old saying goes, "the cure for high prices is high prices." In other words, if the soybean market stays high enough, long enough, it will cut enough demand and attract enough new production to shift the supply/demand balance back in the other direction.
November soybean futures are approaching $14/bu., which is $2.50 above USDA’s preliminary forecast for the 2012-2013 average on-farm price. The higher prices should cause USDA to trim its demand estimates when it starts updating them in May.
For now, however, the market has not seen any evidence that higher prices have cut into demand. The market also won’t have a good idea how many additional U.S. soybean acres high prices might attract until USDA releases its annual Crop Acreage Report at the end of June.
The corn/soybean price ratio indicated by November soybean futures and December corn futures, which has shot above 2.5-to-1, is now offering most Midwest corn and soybean producers an incentive to plant soybeans over corn, but many acres have already been prepped for corn planting and won’t likely be switched. Spring weather will also have a lot to say about plantings.
USDA’s projection of the old-crop world soybean carryout is set to tighten as it should cut its South American production estimates further in the monthly supply/demand update due out Monday, April 9.
Argentina’s agricultural ministry has pegged Argentine production at 44.0 million metric tons (mmt) compared with USDA’s current estimate of 46.5 mmt and trade estimates run as low as 42.6 mmt.
Private estimates of Brazil’s crop now run mostly in the 67-68-mmt range compared with USDA’s March estimate of 68.5 mmt. And the U.S. agricultural attaché in Paraguay recently pegged that country’s crop at 4 mmt compared with USDA’s official estimate of 5 mmt.
All in all, USDA could trim another 4-5 mmt off of projected South American and world soybean production for 2011-2012, which would leave the world soybean carryout down as much as 16 mmt from the record level of 2010-2011.
The one concerning factor in the soybean market is the record large net long position that large speculators, mostly managed commodity funds, now hold in soybean futures/options. That position is now likely near or above 200,000 contracts compared with the previous high of just over 160,000 contracts in fall 2010.
Total soybean futures open interest has now risen to a record high at more than 742,000 contracts as of Monday’s close. Futures open interest was up another 21,337 contracts on Monday.
The surging open interest on rising prices is the sign of a strong bull market. However, the combination of record open interest and a record fund long position suggest that when this market turns, it may turn very hard.
Editor’s note: Richard Brock, Corn & Soybean Digest's marketing editor, is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report.