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Soybean Bull Market: Resting or Exhausted?

Soybean Bull Market: Resting or Exhausted?

Futures price peak for soybeans typically occurs in recent years anytime from mid-July through November, with a peak most likely by September.

The focus on weather for both the U.S. corn and soybean crops since mid-June has been warranted. As the growing season progressed, adverse weather conditions persisted well into July in large parts of the Midwest. Recently, attention has become more focused on the U.S. soybean crop, as August is the time that is most critical for soybean yields. The importance of the size of this crop this year is magnified by the small South American harvest realized in February and March of 2012 from drought conditions in that area of the world.

Steve Johnson, an Iowa State University Extension farm management specialist in central Iowa, offers the following information on the soybean marketing situation.

As calendar moves from July into August, there is still hope that average yields could be obtained in 2012 for soybeans--if rains come and weather turns more favorable than it was in July.

Soybean production forecast will be updated August 10 with USDA Crop Report
In the latest World Agricultural Supply and Demand Estimate report released July 11, the USDA estimated the U.S. average yield potential at 40.5 bushels and production at 3.05 billion bushels. That would be about equal to last year's U.S. crop size. However, crop conditions have declined sharply during July and into August. There is still a perception that average yields could still be obtained if "decent weather" turned more favorable from late July through August.

In the driest areas of the Midwest, permanent yield losses may have already occurred as plant size and pod counts have been reduced. It will be interesting to see what the USDA's August Crop Report says when it is released August 10.

According to Darrel Good, grain marketing economist with University of Illinois Extension, the forecast of U.S. average yield based on trend yields since 1986, percentage of the 2012 crop that was planted late, and the percentage of the crop currently rated in good or excellent condition is near 39.4 bushels per acre. 

This year's August soybean yield forecast may be a little less reliable than normal
A yield of 39.4 bushels, using the USDA National Ag Statistics Service forecast of harvested acres, would result in a crop of 2.967 billion bushels. The lower U.S. production would require soybean consumption in the 2012-13 marketing year to be about 105 million bushels less than during the current year.

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Those August 2012 yield forecasts may be a little less reliable than normal. That's because farmers who are surveyed in late July by USDA to gather the data for the report to be released August 10 have difficulty in judging yield potential that early. Also, NASS at times struggles in projecting yields from the plant counts and pod counts that are taken in late July. The data collected in late July this year by the USDA will be released for first in-field yield estimates of the 2012 crop on August 10.

On July 23 the soybean futures contract for November set an all-time record high at $16.91 ½ per bushel. While the November contract should find strong psychological support at $15 per bushel, that's nearly $2 per bushel off the high. Since an early June low to this July 23 high, November soybean futures price has increased by 36%. Prices since that date have backed off the highs considerably due to heavy profit taking. 

The record-setting bull market run in soybeans is very likely mature now
Soybean price action on July 23 formed a bearish "key reversal" down on the November daily bar chart. This is but one early clue that a market top may be in place. 

There is no doubt the record-setting bull market run in soybeans is mature. The "easy money" has already been made to the upside. The speculators in soybean futures have expended a great deal of energy the past month, and may now be exhausted at these higher price levels.

A review of the Commodity Futures Trading Commission report indicates the nearby soybean futures contracts have been strongly supported by Managed Money Speculators since last February. The concern becomes how much higher these "specs" will chase the soybean futures higher.  Look for futures price volatility in the soybean market to continue in order to seek a futures price high enough to ration a much smaller supply of bushels.  Export demand will ultimately depend on China's appetite for soybeans and the size of the South American crop this next year.

Watch for key signals in weeks and months ahead as to where prices are going
USDA expects South America to maintain a large export presence; however, they have sharply reduced inventories in 2012 as compared to 2011. That's because the 2012 South America soybean crop at 4.2 billion bushels, was 16% smaller than the record crop of 2011. 

By December, South America planting intensions should be known, and by January early yield estimates will be made for the 2013 soybean crop in key producing countries such as Brazil and Argentina. With good growing conditions and a forecast of a return to the El Nino weather pattern, soybean production in 2013 is anticipated to return to 2011 levels. However, tight ending stocks in both the southern and now northern hemispheres on August 31, 2012, should keep November soybean futures prices well supported until adequate supplies can be forecast.

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With considerable production likely and demand uncertainty, it is difficult to anticipate the timing and magnitude of a futures price peak. Pricing increments of old and new crop soybeans over the next several weeks appears to be a prudent strategy. The window of time where a futures price peak typically occurs for soybeans in recent years extends from mid-July through November, with a peak most likely by September.

Consider incremental sales of new crop beans covered by crop insurance|
Conclusion:
Soybean farmers might consider making incremental sales of their new crop revenue protection guaranteed bushels during the next few weeks. Many elevators offer Averaging Contracts which simply uses the average daily futures price closes every day over, for example, the next month. This eliminates the emotion of picking the high price and still allows the opportunity to capture attractive futures prices. 

You should expect the soybean basis to be the widest at harvest. That basis should then narrow quickly post-harvest. Basis might be even more attractive should futures prices decline with a good start to South American soybean planting. Lower futures prices by December would likely mean an attractive basis for those soybean growers who have already locked in high futures prices.

For farm management information and analysis go to ISU's Ag Decision Maker site www.extension.iastate.edu/agdm and Extension farm management specialist Steve Johnson's site www.extension.iastate.edu/polk/farmmanagement.htm.
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