In my December 2006 The Corn And Soybean Digest article, I explained how the rally in corn prices and increase in corn acreage in 2007 would create a bull market in soybeans. I indicated that soybean prices were likely to go higher — and I think the rally has just started.

End users and many industry groups are now projecting a huge increase in Brazilian soybean acreage in 2008. The hope is that increase in acreage will provide enough of an increase in global soybean production to drop soybean prices back to the historic $5-6 lows. However, I see six reasons why Brazil isn't likely to fill the soybean shortage in 2008:

  1. The Brazilian real remains strong and is now trading at 47.19, nearly 100% higher than 2003-04. So the $8 U.S. soybean market doesn't add up to many reals.

  2. High interest rates and carryover operating debt. These two factors continue to drain current profits, and the liquidity that farmers need to clear new land. Many farmers who lost money in 2005 and 2006 are just trying to get current on all debt at the bank. Banks will work with profitable farmers, but limit debt for future growth.

  3. The trap of “green beans.” Almost all Brazilian farmers sell ahead 40-80% of their new-crop soybeans (green beans) and use that contract to secure credit. This means a lot of soybeans were sold last fall (their planting season) ahead of the rally in soybeans. With 40-80% sold, the farmers only have 20-60% to sell at today's higher prices.

  4. High price energy. When I was in central and northeast Brazil in February, diesel was at $4.25-4.50/gal. This reduces current profits and makes farmers reluctant to take on more new acres. This high fuel price along with the cost of putting lime and fertilizer on newly cleared land limits the clearing that will occur next growing season.

  5. Wide basis levels. The rally in the Chicago Board of Trade (CBOT) futures market has created windfall profits for many U.S. farmers who held onto the 2006 soybean crop. As the CBOT soybean market has rallied, basis levels have widened out in Brazil to $1.80-2 under the CBOT futures market.

  6. The most important reason Brazil will not have any significant increase in 2008 is the long delay of getting new land into production. If you clear land this crop year (2007-08) the first crop you can plant will have only 50% of normal yield potential and will not be harvested until February-May of 2009. The first year that you will get 80-100% of normal yield potential is in February-May of 2010.

These six factors illustrate why the global soybean supply-demand equation will stay very tight for 2007-08 and possibly into 2009.

What could prove this analysis wrong? These are two factors that could limit future price increases:

  1. Will the global economy slow down? If so, then demand for soybeans and soybean products will drop as well. One of the positive factors for commodity prices since 1999 has been the huge growth in demand from expanding consumer markets in China, India and almost all of southeast Asia.

  2. Will more Brazilian acres shift out of pasture cotton and soybeans? If so, then additional soybeans will be available without bringing new land into production. I don't see that happening at the current price ratio. What I do see is a slight increase in soybean acres in the northern areas of Brazil to offset increased sugarcane acreage and lower soybean acres in central Brazil.

Bottom Line

Even with tight soybean supplies and higher prices the normal seasonal pattern of higher prices in April-July and harvest lows are likely to occur. As a firm we have 50% of the cash soybeans sold and 40% of the new-crop 2007 soybeans covered with hedges and puts. Current profits are just too good not to have some of them locked in. Get ready on any hard break in the June/July time period to be willing to buy call options.

Alan Kluis is the president of Northland Commodities LLC, based in the Minne-apolis Grain Exchange, Minneapolis, MN. You can contact him at alan@kluisnews.com or call toll free 888-345-2855.