October 12, 2011
Farmers who’d hoped to cash in on high soybean prices at harvest may be reaping regret if they failed to lock in some lucrative preharvest sales, says Chad Hart, Iowa State University (ISU) agricultural economist. Market expectations were high less than two months ago when soybean prices were still in the teens, he points out.
“At the end of August, the season average price projections were right at $14/bu. for soybeans,” says Hart. “We’ve seen a couple big drop-offs since then, but roughly three weeks ago is when we really saw the bottom fall out, and all the commodity markets took a big hit at this time.”
The most recent commodity price dive is related to serious global economic worries, including the possibility that Greece might default on its loans and renewed inflation concerns, both in the U.S. and in China, says Hart. “The banks in Greece have business interests in the U.S., so it could have a domino effect both here and around the world if Greece defaults,” he points out.
Uncertainty over U.S. government agricultural policy may also be undercutting commodity markets, Hart adds. “That’s definitely in the mix of outside forces that have really been pushing the soybean market down for the last month,” he says.
Still, the supply and demand situation for soybeans has changed very little in a way that would explain the recent soybean price plunge. “The Sept. USDA reports showed soybean stocks were a little bit lower than its previous estimate, and soybeans still went down in price,” says Hart. “The markets sold off tremendously after that report.”
The USDA’s October report confirms that the soybean supply and demand situation is still very tight, says Hart. “Right now, we’re not seeing a lot of movement in price, because the market had already anticipated that tightness after the September report and global economic worries are still unresolved,” he adds.
Despite current market fundamentals that favor higher prices, growers will likely continue to see soybean prices work their way downward over the next couple months, says Hart. “There are two reasons for this:
Harvest is seasonally the time for lower prices.
We’ll know whether Greece defaults in the next month or so. If it does, this will have another negative impact on the market.”
The silver lining to this outlook is that “the market has already factored in the possibility that Greece defaults,” says Hart. “Soybeans have already come down in price about 20% since August this year. They could still come down another 10%, but I think we may be finding a floor at about $11.50/bu.”
Beyond harvest season, Hart says he expects a rebound in soybean prices to the upper $12/bu. range if the global economy stabilizes. “There might also be a good postharvest opportunity coming up in late spring or early summer, depending on the global economic situation,” says Hart. “The big wild card is the global economy. If it stabilizes, the outside investment groups (hedge and index funds) will get more interested in agricultural commodities again.”
The pattern the market is seeing from investment groups is very much like 2008, he adds. “The difference today is the fundamentals of the crop,” says Hart. “In 2008, there were initial concerns that the crop would be short. Then the weather turned good and stayed that way, and we saw a short crop get bigger, and soybean prices dropped about 35-40%.”
In comparison, the 2011 soybean crop “still a lot of tightness in the fundamentals,” says Hart. “We may actually have a short crop that gets shorter, and demand is still likely to be somewhat more than supply.”
There’s also the potential that China and other countries that import U.S. crops will make new buys as prices become more attractive. “China’s economy has been growing, and if it continues to grow, we would expect increased demand,” says Hart. “However, any new, unexpected buys are more likely from China in corn than in soybeans. Their soybean stocks are fairly full, but their corn stocks have been pulled down recently.”
Any big, new buys would help boost crop prices again, he says. Whether that happens or not remains to be seen.
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