With current world soybean inventory very tight, combined with a smaller forecasted South American crop, no one knows how long $13/bu. and higher futures prices will stick around, says Chris Hurt, Purdue University Extension agricultural economist.
In fact, extremely low global supplies point toward the potential for soybean prices to escalate even more in the near future, he adds. Especially when you factor in recent China buys of both old- and new-crop soybeans.
"From a historical perspective, $13 beans are fairly uncommon," Hurt says. "However, during the last four and a half years, cash soybeans in central Indiana have traded in the teens or above 24% of the time. Most of those occurrences have happened in the spring and early summers of 2008 and 2011.
"Dry weather in the southern hemisphere may have reduced the soybean crop there more than USDA expects. We'll know more when the Prospective Plantings and Grain Stocks reports come out on March 30," he adds.
As we move past planting, the U.S. soybean crop could develop to boost soybean prices even higher this summer, Hurt says. "Last summer, when the weather was extremely dry in June and July, soybean futures registered some impressive highs before falling sharply in the fall after timely rains improved the production picture," he points out. "A dry July and August this year could push soybean futures up to between $14-16/bu."
Still, only one in every six years sees soybean prices rise higher in summer than spring, he adds. "If U.S. crop conditions are good, any price premiums for weather risks will start to fade from the market by mid-June," he says. "Generally, by mid-August, prices will hit bottom when all the price premiums for weather risks have disappeared."
The drama playing out in 2012 is the high-dollar amounts in risk per acre that are at stake to grow a crop. "The extreme volatility in prices is putting a huge amount of risk on the farmer to be able to produce enough per acre to be profitable."
Part of the volatility in this season's market relates to the risk associated with a slowing world economy, says Hurt. "In a world characterized by recession, economic output will drop as less buying occurs," he says. "The current European debt situation could be one of the factors that might cause lower incomes and less buying to occur and push soybean prices lower again."
Unfortunately, projected production costs have increased substantially in recent years and are tracking close to or above projected prices, points out Hurt. "The 2005 crop was the last low-price year for soybeans, when the average cost of production in Indiana totaled $6.90/bu.," he says. "In 2012, we're estimating cost of production to range between $11.50 and $12/bu. for soybeans, and we're projecting corn's cost of production for 2012 to be about $5/bu."
With normal yields, new-crop soybeans should average about $11.50/bu. for 2012, he estimates. "Yet current, new-crop cash pricing opportunities are more than $1/bu. higher than that. So, our recommendation would be to forward price 25-35% of expected production in the March through Mid-May time period to take advantage of that price difference."
Purdue's projected budgets for crop production (which includes expenses) have shifted significantly in just one month, he says. "Right now, we're projecting a $15 higher return/acre to plant soybeans rather than corn, but on Feb. 1, we were projecting a $40 higher return/acre for corn."