Prospects for a sharp decline in U.S. soybean stocks by the end of the 2007-2008 marketing year suggest that an increase in U.S. soybean production, and therefore acreage, will be required in 2008, says Darrel Good, a University of Illinois Extension marketing specialist. "That perceived need has provided underlying support to soybean prices," says Good. "Some analysts have already projected a large increase in U.S. soybean acreage in 2008. However, forecasts of the acreage response in the U.S. before the outcome of the 2008 South American crop is clearer cannot be very accurate.
"While some production decisions have already been made, producers clearly demonstrated the ability for late-season acreage flexibility in 2007 when planted acreage of soybeans was nearly 3.5 million less than intentions reported in March. There does appear to be a bit of a knee-jerk reaction by producers to plan for more soybean acreage in 2008 with November 2008 futures above $9.50. However, December corn futures at $4.25 suggest that corn is still potentially more profitable than soybeans in much of the Midwest."
Good's comments came as he reviewed soybean prices, which moved to the highest level for the current marketing year on the last day of October. November 2007 futures traded to $10.185. November futures have reached a high over $10 only once before, when the 1988 contract traded to a high of $10.46.
The average spot cash price of soybeans in central Illinois reached a high of $9.73 on Oct. 31, well below the recent high of $10.40 established on March 22, 2004. Basis levels continue to strengthen, although basis remains generally weak by historic standards.
"The Illinois River basis strengthened by 43¢ from Oct. 15 through Nov. 2, while the average central-Illinois basis strengthened by only 20¢," said Good. "The average cash price in central Illinois on Nov. 2 was 35 ¾¢ under November futures, compared to the average for the previous four years of 19¢.
"Future basis strengthening is likely as the marketing year progresses."
The 60¢ rally in soybean futures over the past three weeks has been led by soybean oil prices, he noted. After dipping to about 38¢ in early October, December soybean oil futures moved above 42¢ in early November. December soybean meal futures have been trading between $270 and $280/ton.
"The recent strength in soybean oil prices has been associated with large export sales and rising crude oil prices," says Good. "For the current marketing year, which started on Oct. 1, the USDA has forecast a 24% decline in U.S. soybean oil exports, to a total of 1.45 billion pounds.
"As of Oct. 25, U.S. export commitments were reported at 304 million pounds, 22% larger than commitments of a year earlier."
Higher crude oil prices have supported soybean oil prices due to the expected increase in biodiesel production stimulated by high fuel prices. The Census Bureau has been reporting the amount of fats and oils used in biodiesel production only since January 2006. For the first year, only once-refined soybean oil used in biodiesel production was reported.
"Since January 2007, both refined and crude soybean oil have been reported, as well as the amount of all fats and oils used in biodiesel production," says Good. "It appears that the use of fats and oils for biodiesel production peaks in August.
"In August 2007, 376.2 million pounds of soybean oil were used for biodiesel production, accounting for 20.6% of the monthly use of U.S. soybean oil. That use declined by nearly 26% in September, compared to a 16% drop in September 2006. High soybean oil prices are keeping biodiesel production margins thin even with higher fuel prices."
Relatively strong export sales of U.S. soybeans have also provided some support for soybean prices. For the year, the USDA projects a 13% decline in U.S. soybean exports. Export inspections during the first nine weeks of the marketing year were about 23% less than the total of a year ago.
"However, unshipped sales as of Oct. 25 were about 3% larger than sales of a year ago so that total commitments are only about 9% behind those of a year ago," says Good. "A strong export sales pace, combined with a 3.6% year-over-year increase in the domestic crush in September, suggest that soybean demand remains very strong."
Good says that in the short run, the USDA's November soybean production forecast to be released on Nov. 9 could have some influence on price direction. Expectations are for a slightly larger forecast than the October forecast of 2.598 billion bushels.
"Soybeans that were stored and hedged or prices with a hedge-to-arrive contract have earned good storage returns in the form of basis appreciation," he notes. "Further basis strengthening is anticipated.
"The outcome for soybeans stored unpriced is more mixed, depending on when the crop was harvested. A move to new highs offers an opportunity to sell a few of those unpriced soybeans, but plenty of price volatility is expected over the next several months."