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Rising stocks pressure U.S. soybeans

SINCE THE passage of the 1996 farm bill, soybean, corn and wheat markets have experienced rising stocks-to-use ratios due to production in these commodities out-stripping demand.

"By historical standards, the last several years have been unusually favorable for crop production in the United States as well as the world's major agricultural producing countries," says Nicholas Piggott, assistant professor and specialist, North Carolina State University. "We now are beginning to see the cumulative effects of several consecutive years of large harvests."

Of the projected $46.1 billion in net farm income estimated for 2000, direct government payments make up $22.7 billion or almost 50 percent, says Piggott.

The projected breakdown of the direct government payments is $4.9 billion on Production Flexibility, $6.6 billion on Loan Deficiency Payments, $2.4 billion on the Conservation Reserve Program and other, and $8.9 billion on emergency assistance.

"Despite a rather recent dismal record for commodity prices, with average farm prices below the loan rate, there have been some limited opportunities to do better than the loan rate," says the economist.

This year, he says, is proving to be another "only if" year for many producers who are facing a net price equal to the loan rate unless they took advantage of real pricing opportunities.

"For example, during May, November 2000 soybeans traded at about $5.60 and December 2000 corn traded at about $2.60. Of course, these opportunities were not so obvious back in May," he says.

According to the USDA September crop production report, U.S. farmers planted an estimated 74.5 million acres to soybeans in 2000, 0.7 million acres more than last year's record planting.

Since the passage of the farm bill, with producers now making decisions based on economic returns, there has been an upward trend in soybean acreage and a downward trend in wheat acreage while corn acres has remained relatively stable, notes Piggott.

Of the six largest soybean-producing states in the Southern region, only Arkansas and North Carolina have a projected increase in harvested acres, with increases of 1.5 and 2.3 percent respectively. The other states have a projected reduction in harvested acres, with Mississippi the largest at 13.2 percent.

ALMOST ALL Southern region states, with the exception of Arkansas, Mississippi and Louisiana, are expected to experience sizable increases in yield. This increase more than offsets the reduction in harvested acres.

Record production, disappearance Of the 74.5 million acres of soybeans planted nationally, about 73.5 billion acres will be harvested, says Piggott. If yields average the projected 39.5 bushels per acre, a crop of 2.9 billion bushels will be produced.

This surpasses the 2.643 billion bushels produced in 1999 by a hefty 257 million bushels and breaks the previous record production in 1998 of 2.741 billion bushels by 159 million or 5.8 percent.

Soybean use is expected to be the largest on record for the 2000-2001 marketing year, he says. This record use is fueled by projected crush and export levels. Projected crush for 2000-2001 is 1.63 billion bushels - an increase of 50 million bushels from 1999-2000.

"This increase in crush can be attributed to projected increases in soybean oil and soybean meal in addition to a slightly higher margin. Soybean oil use for 2000-2001 is projected to increase a total of five percent from last year with a three percent increase in domestic use and a 31 percent increase in exports."

Soybean meal use is expected to increase 2.5 percent with a 2.1 percent increase in domestic use and a 4.2 percent increase in exports. Projected soybean exports for 2000-2001 is one billion bushels or an increase of 20 million bushels over last year.

"A projected reduction in Brazil and Argentina exports has been helpful in this respect. In addition, recent adverse weather in China also has been beneficial, which has led to an increased projection in recent months of China's soybean imports for 2000-2001."

Burdensome ending stocks Despite the projected record use, a more than offsetting record production means that an additional 100 million bushels will be added to U.S. ending stocks for the 2000-2001 marketing year, leaving ending stocks at 365 million bushels.

"To put this into some perspective, this represents almost 13 percent of use for one year, or the projected 39.5 bushel-per-acre yield could sustain a hit of approximately five bushels per acre and there still would be enough supply on hand to meet demand in 2000-2001."

The 38 percent increase in ending stocks can be explained by the supply increase of 7.6 percent out-stripping demand, which increased by only 2.6 percent.

"The presence and magnitude of this stockpile tends to dampen the effect of any major price rallies since there is an abundance of soybeans that can come into the marketplace in response to any upward price improvements. However, the situation could have been much bleaker if the earlier prediction of ending stocks of 465 million bushels had become reality."

World markets For the world soybean market, supply is expected to outstrip demand, with world ending stocks expected to increase eight percent. This addition to world ending stocks does not promise much relief for prices, says Piggott.

World production of soybeans is expected to increase 6.5 percent in 2000-2001 compared to 1999-2000, with all of the major players expected to enjoy increased production - a 10 percent increase for the United States and a four percent increase for Brazil and Argentina.

"Exports are expected to decline by two percent, with the biggest decline in Argentina. Imports also are projected to decline three percent, with all of the major importers expected to import less. The biggest decline comes from China at 19 percent."

For the more general world oilseed market, including soybeans, cottonseed, peanut, sunflower seed, rapeseed, copra and palm kernel, a similar projection prevails, with demand slightly out-stripping supply. This results in a slight increase in world ending stocks.

The overall supply of oilseeds is projected to increase 2.1 percent, says Piggott. "The overall effect is a slight increase in world oilseeds ending stocks of 1.7 percent, with increases in soybean, cottonseed and palm kernel ending stocks slightly outweighing declines in the ending stocks for peanut, sunflower, rapeseed and copra."

Price prospects USDA currently is projecting a season-average soybean price in the range of $4.35 to $5.15 per bushel. During the first part of August, the November 2000 futures contract found some support at the $4.50 level, slightly above the contract low of $4.45.

"This support could be attributed to the USDA outlooks in August for more favorable crushing, in addition to export estimates with projections being upgraded by 15 million bushels and 40 million bushels, respectively, compared to the July estimates. Also, the possibility that August weather conditions could pose a threat to soybean yield provided some strength.

"At that time, 19 percent of this year's crop was rated as excellent, 46 percent as good and 24 percent as fair, which is well ahead of last year's condition at the same time."

On the western and southern edges of the soybean belt, the crop suffered through a very hot and dry August, says Piggott. The states most severely effected were Kansas, Nebraska and the Lower Mississippi River Valley.

As a result of weather stress, soybean crop conditions plummeted to 11 percent excellent, 42 percent good and 28 percent fair, according to the September report. Although the 2000-2001 production still is expected to be a record, it has been downgraded some 89 million bushels from the estimates made in August.

This lowering of production was good news for prices, he says, with the USDA increasing its U.S. season-average farm price to $4.35 to $5.15 from August's bleaker prediction of $3.90 to $4.80. Also in response to adverse weather, the November 2000 futures contract trading in the $4.50 range in early August gained some strength and rallied back to the $5 level.

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