The combination of $5 soybeans and the U.S. dollar dropping to 87% has taken international soybean prices down to the lowest level since the U.S. soybean futures market bottomed at $4.01/bu. in 1999.
International buyers are looking at current prices in the lowest 5% of the soybean trading range available in the last 30 years.
Price works. The world may have had too many $10 soybeans, but odds are good it won't have enough $4 soybeans. Historically, odds suggest prices will work higher within the next three to nine months for four reasons.
Soybean export demand is improving. Export sales reports in the first month of the marketing year are showing sales well above trade expectations. Once U.S. soybeans work into a market, that customer tends to keep buying them.
Meal exports have surged to record levels during the last 60 days. Global livestock feeders are locking in prices that are down 50-60% from the prices they were paying just six months ago.
With good profits in the U.S., global livestock industry, demand for meal should increase 2-4% in 2005.
Look for a drop in competitive supplies of meal and oil. Canola production is down in Canada and groundnut production is lower in India. Unless global prices rebound by spring 2005, look for oilseed acreage to drop in the northern hemisphere in 2005.
A record soybean crop (up 20 million metric tons) from Brazil is expected and built into the 2005 soybean market. Brazilian soybean farmers are running into a major profit squeeze (see sidebar below) so the big increase may not occur.
One of the first challenges will be locking in the maximum LDP. With the carrying charge in the futures market, odds are good that the LDP available now will be gone in 2005 — even if futures don't rally.
Next, make sure you're watching your basis. Soybean processors in the western Corn Belt will again be aggressive in bidding for cash soybeans this winter.
Use any weather scare in South America from December — February to complete sales. If you want to maintain ownership into the summer of 2005, holding call options is probably your best alternative.
Brazilian soybean farmers are being hit with a quadruple whammy this year. After 10 years of huge acreage increases and record profits, the profitability of soybean farming in Brazil is taking a hit in 2004-2005.
Soybean rust is a devastating disease that has increased farmers' production costs by $40-50/acre. The soybean industry has plenty of fungicide available, but it's very expensive.
The worst-case scenario is that fields have to be sprayed three times. If the spray is not applied in time, a yield loss of 80-100% occurs. Until rust-resistant varieties are developed, this will be an ongoing problem.
The global soybean market dropped by more than 50% from the highs posted in April 2004 to the lows made during the U.S. soybean harvest. Keep in mind that Brazilian farmers don't have an LDP or counter-cyclical payments.
The Brazilian currency, the real, has rallied from being worth 30¢ last June to 35¢. Last summer when U.S. soybeans were at $10/bu. and the real was at 30¢, farmers were getting 33 real/bu. of soybeans. The price is currently down to just 14.8 real/bu. — 20% lower than the lowest price paid in October 2002.
Higher energy prices are increasing input costs. Not only are soybean farmers being forced to buy fungicide to fight their rust problem, but also fertilizer, chemical and fuel costs are up 17-22%.
Imagine trying to turn a profit when the U.S. soybean futures market is trading at $5.20 and you're in an area with a $1.20 basis. Even the most efficient farmers have a difficult time making a profit.
Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want more information, write: Northstar, 1000 Piper Jaffray Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail: aginvestor@agmotion.com.