During the 1980's through 1995, the seasonal price pattern (SPP) for soybean prices was predictable and fairly reliable. The normal SPP called for a harvest low during the North American soybean harvest in September-October, with a high coming in April-May of the following year.
The monthly CBOT soybean chart (below) shows that harvest lows were often below $5/bu with a better than 70% chance that soybean futures would trade above $7 by the next summer. The exception to this rule came in 1996, when soybean prices were around $7/bu during harvest. The harvest period, also known as the counter-seasonal high, was followed by a seasonal low in the February-May time period the next year.
What happened to the old pattern of storing soybeans from the harvest low for four to six months until the marketplace paid you a much higher price? The answer is to look south — all the way to South America.
Production in South America has increased from 20% to 30% of the U.S. soybean crop total to the point where total production is now 80-90% of our domestic crop. Odds are very good that, in 2002 or 2003, South America's total will exceed the U.S. soybean crop. As a result, storing soybeans for six months will be holding into the South American harvest low.
This increase in South American production is a long-term fundamental change. Look for these three key changes to develop:
Timing: The old SPP used to look like an inverted V with low prices in September-October followed by a high in April-May and the next low again at harvest.
Now, the pattern is likely to look like an M. The usual harvest low is followed by a December-January high, an April-May low, a July-August high and then a September-October low again. It is a forecast like last year's — herky-jerky.
Magnitude: The soybean market used to have at least a $3 price range each year. Quite often, $4.50 soybean prices in fall would open the door for $7.50 soybean prices by next spring. With greater production out of South America, look for a $1.50-2 annual price range. Soybean futures at $4 will be followed by a high in the $5.50-6 price range.
Front-end rallies: Some bad weather in summer and the forecast for additional production problems rallied the entire soybean futures market, with new crop bids often leading the charge higher.
Now, with another supply of soybeans always likely to be available in six months, the front-end (nearby futures) market will usually lead the rally. In a good demand-driven market, your cash bid is often higher than the bid that's out three to five months later.
Take advantage of the fast nine- to 20-day rallies. The old three- to four-month gradual rallies are history.
How do you adapt your farm marketing to the new marketing pattern?
First, set realistic goals that include a marketing plan calling for sales to start at $5 and be wrapped up by $5.50. This approach has a good chance of being executed. A plan calling for the first sale at $7 is an old dream.
Second, make more sales of 10-20%. The old habit of one or two large sales is too dangerous and does not fit with the new global fundamentals.
Third, think $/acre, not $/bu. With higher yield potential and growing South American competition, growers who turn their soybeans into cash early often also generate the most dollars.
Alan Kluis is president of NorthStar Commodity Investment Co. If you have marketing questions or want more information, write: NorthStar, 1000 Piper Jaffray Plaza, 444 Cedar Ave., St. Paul, MN 55101; call: 800-345-7692 or e-mail: aginvestor@agmotion.com.