Farmers have been shocked by the rapid decline in both old-crop and new-crop soybean prices in July. The extreme drop in old-crop prices and basis has been the biggest surprise, and seems out of line with indicated record tightness in U.S. old-crop supplies. ISU extension economist Bob Wisner says four developments appear to have contributed to the break in cash prices. He adds that U.S. soybean and soybean meal supplies for the rest of summer continue to look quite tight, but not as tight as many had expected.
Wisner says U.S. soybean export shipments have been very slow in recent weeks. The reduced exports reflect cheaper South American supplies. Reduced exports make more soybeans available to U.S. domestic crushers.
How low can carryover stocks go?
He notes that until recently the grain trade had assumed U.S. Aug. 31, 2004, carryover stocks could not drop below 100 to 110 million bushels. But it has been decades since the market has tested how low the carryover can go. "Recent market behavior suggest stocks may drop moderately below 100 million bushels, also releasing more soybeans for crushing this summer," says Wisner.
The economist said a third influence on old-crop prices is the rapid development of the soybean crop in the southern Delta region. Due to early planting, that region may have 12 to 16 million bushels of 2004-crop soybeans available for crushers to use before the end of August. Some soybeans may be shipped north for processing, but most probably will be processed in the South and the meal shipped to the highest bidding domestic markets.
The fourth factor behind lower soybean prices is the expectation that last year's soybean crop has been modestly under-estimated. Export and crushing data along with the June 30 stocks report suggest this may be the case. That too could provide a more soybeans than currently indicated by the supply numbers.
Harvest prospects for new crop are good
"Grain market psychology changed dramatically in July, causing large commodity fund traders to close out long positions in futures," says Wisner. Recent reports indicate some large speculative traders may have recently sold to establish short positions in futures, positioning themselves to profit from declining prices.
He says that new-crop corn and soybean prices have been pressured by rising expectations about 2004 crop prospects and lack of widespread heat or dry weather stress. Barring adverse weather in August, soybean traders in the next several weeks will probably expect combined U.S. and South American soybean production to be up by an extremely sharp 1.2 to 1.3 billion bushels from last season's abnormally low level.
The grain trade is taking note of much better crop prospects in Europe and former Soviet republics than a year ago, and indications that China's corn crop may be improving after four years of low yields, according to Wisner.
Improved foreign crops slow U.S. corn exports
Improved foreign crop prospects probably are a factor behind the slow start in 2004 crop U.S. corn export sales. Market behavior the third week of July suggested the trade was expecting a record 10.7 to 10.8 billion bushel U.S. corn crop and some decline in 2004-05 exports. USDA's first official crop forecasts will be released Aug. 12.
Wisner says that between late July and late August, temporary and very volatile strength in old-crop soybean prices from the July 22 level is likely. He adds that modest weakness in new-crop soybean prices is likely if Midwest August rainfall and temperatures are near normal. With new-crop corn bids approaching loan rates, risk of further weakness in harvest-delivery corn prices may be less than for soybeans.