The bigger the crop, the more we've got to sell. Seems simple enough ... right? In the past, it was a fairly simple process to sell a big crop -- the threat of lower prices moved a lot of beans off the combine and into the demand pipelines. Once there, attractive bean prices for buyers kept crushers busy and export demand strong.
This year, there are a few glitches in that scenario:
There's no confusion over the fact that Brazil's planting progress starts to have an impact on the U.S. soybean market by November. This year, however, some uncertainty has been added to the mix. Lower-yielding, early maturing soybeans (produced to capture big early harvest price premiums) are normally planted by Nov. 1. In 1997, however, these beans went mostly unplanted. So growers will produce higher-yielding full-season varieties.
Two key factors result: 1) The average yield and total production in Brazil will likely be slightly higher than trade expectations. 2) The demand window for U.S. soybeans is wider. Normally, Brazil has new-crop soybeans available by early March. In 1998, however, the first significant supply of new-crop beans won't be available until late March.
At this time, the second factor is most critical. Demand for U.S. soybeans has never started stronger, and USDA has already built assumptions of record use into supply and demand scenarios.
Brazil also became an unreliable bean meal supplier, potentially sending traditional Brazilian customers to U.S. shores. The unavoidable delay in 1998-crop Brazilian beans ups the odds that demand for U.S. beans/products will remain strong.
The threat that El Nino's evil sister, La Nina, will bring drought to the U.S. Midwest in 1998 has already had a significant impact on U.S. bean prices. Just as the record '97 bean crop was being harvested, soybean prices shot higher. Demand was the primary reason, but the demand-based buying was led by end-users fearful that El Nino/La Nina influences would grind bean prices higher through the winter months. They viewed the harvest low as an excellent opportunity to establish some extended coverage -- just enough to have "something" on the books if '98 weather forecasts "turned dry." In '98, traders will be quick to react to threats of dry conditions and won't likely wait for the proof of dry conditions before establishing long positions.
All this concern over El Nino/La Nina at least contributed to the bean market's ability to post a higher-than-expected harvest low. But the higher-than-expected harvest low should also have the impact of reducing overall demand (because of the higher average price).
The greatest impact of the bean market's price resiliency is on our normally reliable Southeast Asian customers. The Asian economic crisis saw the value of currencies in countries like Indonesia, Malaysia, Taiwan, Thailand and the Philippines drop 20-30% against the U.S. dollar in about four months. As a result of the strong dollar, the cost of U.S. ag commodities for these countries skyrocketed. China and Japan were also impacted, but not to the extent of these other countries.
USDA moved quickly to shore up the buying power of these countries by extending credits under the Commodity Credit Corp.'s General Sales Manager (GSM) program. The Philippines, for example, hadn't used a GSM credit line for two years. But, as early as Nov. 1, it had already made small buys of U.S. grains/oilseeds using the program.
Most importantly, USDA has shown signs of getting more aggressive with GSM credit lines for these countries if conditions in Southeast Asia don't improve soon. Also, USDA has given assurances that none of the GSM-target countries are becoming uncreditworthy.
Bottom line: Selling a big crop is normally easy. This year, it isn't. Price is the primary reason. And late '97 price action at least suggests the bean market has moved to a higher pricing plateau.
Also, there's the very real threat of a significant bull market. Normally, when a record crop is harvested, the best strategy is to be at least 70% sold by harvest. This year, Pro Farmer believes holding half of '97 production into 1998 is a more prudent marketing maneuver.