Bean Price Will Stay Edgy For Awhile

You can expect an extremely volatile soybean market through the summer. Keep an eye on China for corn price clues. Rod Swoboda

Published on: Jun 26, 2004

At a field day in northeast Iowa on June 24, a farmer asked Bob Wisner a question many farmers are pondering. The U.S. has a shortage of soybeans in storage this summer because of last year's short crop. But just exactly how many soybeans are actually left on farms at this stage of the game in 2004?

"My impression is not very many," answers the ISU extension economist. "And the soybeans that are out there in storage will be hard to attract into the marketplace. It's going to take a strong basis and strong cash prices to bring those beans out of farmers' bins and farmers' hands."

This tight situation virtually guarantees an extremely volatile soybean market on through the summer, probably right up to the middle of September, he says.

"It's quite possible we'll see 75 cents to $1.00 per bushel movement in soybean prices just in the course of a day, at times. We've seen moves almost that strong on some days during the past month." Wisner's conclusion is, "there's more bean price movement ahead until the new crop starts being harvested."

What's going on with soybean basis?

The price basis for soybeans is doing a significant part of the rationing job on soybean crushing this summer "We have a short supply of beans. Crushing must be reduced to stretch that supply, so we don't not run out of beans," he explains. Figures on U.S. crush, provided by the National Oil Seed Processors Association this past week, showed a 16% drop in crushings in Iowa compared to a year ago. The drop is 18% in Illinois and in the south central U.S. it's down 67%.

So, in some areas of the U.S., we're getting a sharp cutback in the crushing of soybeans this summer. Crush has actually increased in Minnesota, however, due to the opening of a new soybean processing facility there.

That Minnesota plant's robust bidding for beans is contributing to a strong northwest Iowa cash basis on beans. It's been above a dollar per bushel at times in recent days in areas of northwest Iowa.

Bean price basis is unusually strong

"This basis situation is unusual," says Wisner. "If we've had it before, it was back in the early 1980s or perhaps in the 1970s. You may recall the Feruzzi grain situation that took place on soybeans years ago."

"I don't know for sure if we had a basis this strong back then, as we're seeing now," he says. "This is a highly unusual market situation we're seeing today. It is being brought about by a combination of Brazil's soybean production problems last year and also the very low yields here in the U.S. last year."

The bottom line is, bean yields were low last year in both locations—North America and South America. When farmers were suffering through the long siege of low grain prices that hit in the late 1990's and hung around into the first couple years of the new 2000 decade, we had four years in a row of good growing weather on a global basis. Looking back 500 years in history, that hadn't happened ever before.

Have we moved to a higher level for grain price?

Given the variability of weather that we are experiencing, are we moving into a time frame when the overall range for grain prices is going to be higher than we experienced in the last 10 years? "I think that is very likely to happen, for a couple reasons," observes Wisner.

"Since those four consecutive years of big crops in the world, we've had two years of back-to-back foreign grain production that was sharply below normal, both in soybean and in feedgrain crops," he notes. "That has reduced our world grain stocks considerably. Today, we don't have much of a reserve."

On top of that, there's a widespread view among economists today that China may be shifting from being a corn exporter to a corn importer on the world market. That would be a big change, if it indeed is happening. Since the early 1980s China has been the second or third largest exporter in the world.

Rising ethanol use is boosting corn price

"Such a switch in China—from being an exporter of corn to an importer--would have a substantial impact on corn prices. That would have an effect of boosting prices, along with the rapid expansion in ethanol production that we're seeing taking place in the U.S.," notes Wisner. "Ethanol production has started using a lot more corn per year. That rapid rise has come because more processing facilities have been built to manufacture the fuel during the last few years."

USDA had earlier in 2004 released numbers projecting that China may be exporting 4 million metric tons of corn this year. Now, USDA is looking at knocking that projection down to maybe a half million metric tons of total Chinese corn exports. That's quite a shortfall to be made up by other grain suppliers during a time when we don't have a lot of loose grain on the world market.

Keep an eye on China's corn crop

Will that scenario of China becoming an importer of corn materialize? The answer depends heavily on how Chinese corn production turns out this year.

"For 36 years there was a strong upward trend in corn yields in China," notes Wisner. "But for the last four years, Chinese corn yields have been sharply below normal. Early indications currently suggest that their growing season this year may be starting off somewhat better than it did last year. However, corn yields are still a big question mark for China this season."

If China ends up with normal corn yields this year and the acreage is the same as last year, Chinese corn production would turn out to be more than 800 million bushels above last year. That would probably allow China to continue exporting for another year, Wisner believes.

But currently, USDA's latest numbers are saying the yield in China will probably be as low, or possibly even a little lower, than last year. Thus, China's yield prospects are a big question mark. "Even so, at least today, it is widely believed in the grain trade that China will be a minimal corn exporter and possibly an importer of corn in the year ahead," sums up Wisner.