Soybean bear grinds to a halt on poor weather

January 25, 2012 06:00 PM

Anticipation of record South American soybean crops ended a powerful bull run in the soybean market. Prices have fallen by more than $3.50 per bushel since late summer. Not only would there be more beans available to Asian buyers than ever before, but South American farmers planted early for the second consecutive season hoping to capture more Asian business.

As it turns out, the crops will be neither as abundant as believed nor will they be early. Weather has wreaked havoc with the crops in both Brazil and Argentina. Severe drought in Southern Brazil and Argentina has forced crop estimates to be rewritten. Excessive precipitation in Western Brazil, where crops are ready for harvest, will delay the harvest and very likely lower yields.

US ending stocks were expected to reach their highest level since the 2006-07 marketing year. In the January USDA crop report, the estimate for 2011-12 was actually raised substantially, by 45 million bushels, to 275 million bushels, mostly a result of a 25- million-bushel downward revision to US exports. That would put the US carryover at 9.13% of consumption, up from 6.5% in 2010- 11. In light of recent developments, however, that revision could prove to be a bit premature, as buying has shifted back to the US.

Overseas buyers are certainly concerned. For the most recent weekly period, the USDA reported that export sales were almost double the 4-week average at 990,000 tonnes, an extraordinary figure. China was not the only buyer. About a third of the total went to China, but the balance was scattered. China has been active in the market since, and we expect the upcoming commitment report on January 26 to show another week of stellar sales.

The January USDA crop reported revised Brazilian output down by 1 million tonnes, to 74 million tonnes. Argentinean output was lowered by 1.5 million tonnes, to 50.5 million tonnes. Those estimates are most likely dated. On January 24, German oilseed analyst Oil World put Brazilian and Argentinean production at 72 million tonnes and 48.5 million tonnes, respectively.

The estimates are all over the place, but consider that if Oil World is anywhere close to accurately assessing the damage, the global balance sheet takes on a whole new complexion. Based on the revisions in the USDA January crop report, the estimate for 2011-12 global ending stocks would be 24.4% of usage, down a bit from the December estimate for 24.8%, but significantly below 27.2% at the end of the 2010-11 marketing year.

If we incorporate Oil World’s estimates for South American output into the global balance sheet, we would see a much steeper drop for ending stocks, to 22.9% of usage. That would be a throwback to the inventory levels that sent soybeans to outrageous levels in 2008. We’re not quite there yet, but Oil World qualified its estimates, cautioning that if we don’t see some serious rain in South America, it could see further downward revisions to crop size.

US farmers planted 75 million acres of soybeans for the 2011-12 crop. As we approach planting preparation for the 2012-13 season, Informa Economics weighed in with an early forecast for US plantings. Corn area is expected to expand at the expense of soybeans, with just over 74.5 million acres planted to soybeans. There is still ample time for acreage decisions to be switched, but prices will have to move higher to inspire farmers to increase soy planting.

Weather-market rallies can unfold in a flash. Yet it does seem that there was at least some measure of irreparable damage.

Buy March soybeans at the market to cover short positions, which replaces our November 14 recommendation to stop short positions at $12.35 per bushel, basis the nearest contract. In addition, buy March beans to establish a long position, placing initial stops at $11.50, close only.

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