Soybean prices have been moving steadily higher since December, when South American soy regions began to experience drought. There were pockets of relief from the dry weather, but overall crop estimates have been slashed across the board for both major producers, Brazil and Argentina, as well as for smaller producers, such as Paraguay.
Both Brazilian and Argentinean output will be substantially below last year’s and – more significantly – well below expectations that were based on planted area. According to the March 9 USDA crop report, the estimate for Brazilian output has tumbled to 68 million tonnes, down from 75 million tonnes in December. Argentinean production is now estimated at 46.5 million tonnes, down from the 52-million-tonne December forecast.
The April USDA crop report will give us a better idea of whether the improvement in Argentinean weather resulted in significantly increased output.
Last year, Brazil and Argentina harvested 75.5 million tonnes and 49 million tonnes, respectively.
The global balance sheet takes a big hit from the South American situation. The estimate for ending stocks was 24.8% of usage at the end of December and has now fallen to 22.5%. While inventories are not quite as low as the 19.2% level reached in 2008-09, there has definitely been an impact.
Studying US exports, we find that commitments are still lagging last year by a wide margin – 30.8 million tonnes compared with 40.2 million tonnes last year at this time. We should hit the USDA target for final sales of 34.7 million tonnes, though, because shipments are keeping pace with historical trends. Exporters have shipped 83% of commitments, virtually the same percentage as last year at this time.
Demand for US beans, which typically fades at this time of year, has definitely reflected some nervousness about smaller supplies from South America. Commitments for old and new crop beans have been well above average. Over the past five weeks, old crop commitments averaged 723,000 tonnes. In the previous five years, average commitments in the comparable four-week period were 340,000. Moreover, during this period, new-crop commitments are normally insignificant, but this year they averaged 1.01 million tonnes. Much of the surge in sales was part of the deals that a well-publicized Chinese delegation signed with exporters. Regardless, the sales are booked for the 2011-12 marketing year, and if the beans are shipped, they will draw down inventories.
The USDA’s 34.70-million-tonne 2011-12 US export estimate has not been revised since the number was lowered in January from December’s 35.38-million-tonne estimate. It was a bit of a surprise that the USDA did not raise the export estimate in the March crop report. The balance of evidence suggests that with more than five months remaining in the marketing year, the estimate could very well be raised.
The poor showing of South American crops, as illustrated, has reignited the bull market that began at mid-decade (Chart 1). Global inventories remain at levels that have sparked fears of tightness and have spurred purchases by overseas importers. US farmers – at least according to preliminary reports – are putting a heavier emphasis on corn acreage to the detriment of soybean plantings.
A potentially bearish factor is that the rally could change the dynamics of planting decisions. Chart 2 shows that new-crop soybean prices have improved dramatically vis-à-vis corn prices over the past few months, and that could play heavily on whether the large shift to corn acres will materialize. We’ll get a better idea on March 31, when the USDA reports planting intentions.
We remain bullish, but we have company. Open interest has soared and has continued to rise even as the market began to pull back a bit (Chart 3), a time-tested indication that we could be looking at a top, albeit a temporary one. We advise adding to existing long positions or establishing new positions only on pullbacks. Raise stops on existing positions to$1,250, basis July close only.