The June USDA supply/demand situation report maintained its May output estimates for the 2011-12 US soybean crop for both acreage and yield. Normally, that’s par for the course between the March 31 and June 30 acreage estimates, at least as far as acreage is concerned. This year was different, though, because massive flooding forced the USDA to lower corn acreage by a not insignificant 1.5 million acres, or 1.6%.
There was some expectation that some of the abandoned corn acreage would be planted to soybeans. The window for corn planting closes earlier than for soybeans, which gives the land more of a chance to dry from the excessive precipitation. While the USDA left the soybean area estimate unchanged, private forecasters still believe that soybean acreage estimates will be revised up in the June 30 acreage report.
The May estimate for US 2011-12 ending stocks was 160 million bushels (4.4 million tonnes), or 4.8% of usage. That was a bit scary, because it would have been the fifth consecutive season of record- or near-record low carryover stocks. However, the demand side weakened between reports, and as a result of a combined 30-million-bushel (817,000 tonnes) downward revision in old- and new crop export estimates, the forecast for 2011-12 ending stocks rose to 5.8% of consumption. That’s still tight by historical standards, but provides some breathing room.
Old-crop export commitments stand at 41.8 million tonnes, which is actually above the USDA estimate for a downwardly revised 41.37 million tonnes. Even that revised estimate is likely to be lowered again. Weekly shipments would have to average about 400,000 tonnes per week to meet the USDA target, but they’ve tailed off sharply, averaging below 200,000 tonnes over the past four weeks.
Of course, it’s no great surprise that foreign demand for US beans would begin to wane, at this time of year. South American crops are in harvest, and the Chinese have shifted their buying interest to Brazil and Argentina.
The Brazilian crop had its weather challenges this year, but yields were excellent, regardless. The USDA revised its output estimate to 74.5 million tonnes, up 1.5 million tonnes from the May estimate.
The soybean market participated in the recovery in commodity prices that followed the 2008 commodity-price collapse. Prices doubled. It is questionable whether the powerful bull run was warranted in terms of soybean supply/demand fundamentals. Were it not for the broad-based rally in all commodities, soybean prices, arguably, may have remained confined to much lower prices over the past two years.
Traders focus heavily on US production and exports, which used to be astute when the US was by far the world’s largest producer. But that has not been the case for about 10 years now, since South American producers expanded their crops exponentially. In 2008- 09, global ending stocks fell to 19.2% of consumption, which was clearly a deviation from the historical norm and constituted bona fide tightness. After that, however, combined Brazilian and Argentinean production surged, from 90 million tonnes in 2008-09, to 123.5 million tonnes in 2009-10.
True, Asian buying took off as well, and there is always the gap between the time the US has sold most of its soybeans and the time that the South American harvests become available. But ending stock estimates were never really in danger of getting close to 2008-09 levels. In 2009-10 stocks ran up to 24.8% of usage, followed by further gains in 2010-11, to 25.22%.
The early USDA forecast for 2011-12 is for inventories to fall to 23.3% of consumption. That assumes that demand will grow by 3% over 2010-11. Perhaps, but that ending stock figure would still be above the 22.57% average of the previous 10 years.
In conclusion, soybean prices benefitted from the secular bull market in commodities, and more specifically from strength in related markets, such as corn. The fundamentals are not bullish, but it’s been dangerous to be short anything, so we are hesitant to recommend an outright short position. Observe from the sidelines.
