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More so than usual: Crop report key to soybean market

USDA's October crop production report, typically a bellwether for new crop soybean futures, is taking on even greater significance as farmers ponder their next moves in this year's highly volatile market.

The November 2004 soybean futures contract, set to expire in mid- to late November, has given growers a wild ride, climbing from its 2003 harvest-time low of $4.83 per bushel to a 2004 planting-time high of $8.02 before dropping back to late-September levels of $5.40 per bushel.

Producers may see more of the same, depending on the Oct. 12 crop report and growing conditions for the crop farmers in Argentina and Brazil are beginning to plant, according to a North Carolina State University economist.

“Several marketing newsletters are claiming that the bottom is in (at $5.40), but it is my opinion that claim is premature and not supported at this stage,” says Nicholas E. Piggott, associate professor and Extension specialist with NCSU's Department of Agriculture and Resource Economics.

“The market has been trading more recently in a tight range, trying to decide exactly what the production in the United States this year will be. It might not be until the October report that we have a clearer picture.”

Speaking at the Southern Region Agricultural Outlook Conference in Atlanta, Piggott urged farmers who have not priced their 2004 crop to pay close attention to the Oct. 12 crop production report, which, he said, should reflect field data measurements more so than earlier reports.

“Once a clearer picture on the yield prospectus is obtained, look for the market to break out of the current tight range of $5.40 to $5.50 we have seen this week (the last week in September),” he said. “If the consensus is that the crop is smaller than expected, we should see the market rally and make a run for filling the gap that begins at the $5.94 level.

“If the news is favorable — the crop is larger than expected — we should see the market decline further and test a second support level at around the $5.28 per bushel level.”

Farmers who have not sold any new crop soybeans should look to any rally from the October report to do some pricing “with realistic expectations around $5.90. This is especially important for farmers who have little on-farm storage given the poor carries on offer.”

If the rally fails to materialize and prices decline, marketing options will be limited, he said.

“A wait-and-see-approach of storing soybeans and holding out for planting woes in the South American market might offer the most promise,” says Piggott. “Something less than perfect growing conditions will lead to a tightening of world supplies.

“Herein lies the key to post-harvest price prospects for the U.S. soybean market. Any adverse weather in the South American growing season should have a positive and significant impact on post-harvest U.S. prices.”

Piggott says the October report is likely to show lower yield prospects than USDA's initial projection of an average yield of 40 bushels per acre last May.

“This projection has tempered since, downgraded in the June and July reports to 39.9 bushels per acre, 39.1 in August and in the September report to 38.5 bushels,” he said.

“The reasons cited for the overall lower yield prospects were less than perfect conditions in the Midwest. This reduction of 1.5 bushels per acre represents a decline in total production of 111 million bushels (on the 73.7 million acres to be harvested). Interestingly, this projected reduction is more than half of the anticipated ending stocks of 190 million bushels for 2004-05.”

Last spring's higher prices helped reverse a three-year decline in U.S. soybean acres, prompting growers to plant an estimated 74.8 million acres — 1.4 million acres more than in 2003. If on target, the 74.8 million acres will be the largest U.S. planted acreage on record.

A national average soybean yield of 38.5 bushels per acre and 73.7 million harvested acres would translate into a soybean crop of 2.84 billion bushels, which would be 13.3 percent larger than last year and just shy of the record 2.89 billion bushels harvested in 2001.

Piggott expects the demand side of the soybean balance sheet to increase 10.5 percent in 2004-05 (September-August), due to a 5.2 percent rise in U.S. soybean crush and a 13 percent jump in soybean exports.

“This turnaround in use represents a departure from the two previous marketing years where total use, crush and exports were significantly below the previous record levels of 2001-02,” he noted. “Although 2004-05 use levels do not represent a full recovery, falling 175 million bushels short of the record 2.933 billion bushels in 2001-02, it does represent a substantial rebound.”

Analysts predict the total world crush for soybeans will increase 8.7 percent to 6.61 billion bushels in 2004-05. The breakdown provides some disturbing numbers for the U.S. soybean industry.

South America has taken the lead with Argentina processing 963 million bushels and Brazil 1.27 billion bushels for a total of 2.24 billion bushels. The United States is next with 1.62 billion bushels followed by China at 1.02 billion bushels and the European Union at 570 million bushels.

The 8.7 percent increase in world crush from 2003-04 stems from a 5.19 percent increase in the United States, a 10.76 percent increase in South America, a 9.32 percent increase in China and a 6.02 percent increase in the EU-25.

“It is noteworthy that the increase in crush in South America and China for this year compared to the previous year is about twice that of the United States,” says Piggott. “This observation should act as a heads up to the U.S. soybean complex and livestock industry about more longer-run consequences and strategic implications of these value-added players and the location of the world's crushing capacity.”

Besides being the largest crusher, South America has also become the largest exporter with 2004-05 shipments projected at 1.14 billion bushels compared to 1 billion for the United States. The majority of those exports are destined for China, which is projected to import 827 million bushels and the EU, 594 million bushels.

“Clearly, China is positioning itself as a supplier of crush capacity or value-added with imports of 827 million bushels and a crush of 1.02 billion bushels,” he noted.

Overall, the projected 9.52 percent increase in total use in 2004-05 will not be enough to full offset the substantial projected supply increase of 18.28 percent, meaning an increase in world ending stocks of 37.96 billion bushels, says Piggott. “This increase in world ending stocks releases some of the pressure on world price that transpired the previous year.”

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