The May 10 USDA crop report, which included the first comprehensive forecasts for the upcoming 2012-13 marketing year, presented a fairly bullish picture for soybeans.
For the US old-crop, estimates for both domestic and foreign demand were raised yet again. This resulted in a significant 40-million-bushel downward revision to the estimate for ending stocks, to 210 million bushels, or 6.8% of usage, down from the previous estimate of 8.2%.
Planted area for the 2012-13 US crop is expected to fall by 1.1 million acres, to 73.9 million acres, or 1.3%. Yields, however, are expected to jump by 2.4 bushels per acre, to 43.9 bushels per acre, or by 5.8%, resulting in a near-record crop of 3.2 billion bushels. Nevertheless, ending stocks are expected at a record low of 145 million bushels, or 4.4% of usage, because demand is forecast to outstrip production, drawing inventories down even further.
The market rallied initially, but the rally lasted for only the day of the report, and then proceeded to drop sharply to multi-month lows (Chart 1). There were no great shocks per-se contained in the report, but the data were definitely more bullish than expected. The average guesstimate for 2012-13 US ending stocks was 164 million bushels, against the actual figure of 145 million bushels.
US exports for the current 2011-12 marketing year are forecast at 1.315 billion bushels, considerably lower than last year’s 1.501 billion bushels. However, exports have been much better than expected, and the USDA is scrambling to keep up. The USDA has revised its estimate for the second consecutive month and is still behind. As of the latest weekly export report, commitments stand at 1.317 billion bushels.
Old-crop sales have been outstanding and much larger than is typical for this time of year, when old-crop sales are winding down. Over the past four weeks, average weekly old-crop commitments were 22.7 million bushels, compared with only 4.3 million bushels during the comparable period last year. Even if the current pace is not sustainable, any degree of continued sales will force the USDA to raise the estimate for annual shipments once again in the June crop report.
The chink in the armor of the seemingly powerful export market is that shipments are a bit weak. Last year at this time US exporters had shipped 90% of final sales, whereas this year that figure is 85%. This leaves commitments vulnerable to cancellations. In fact, there have been stories circulating that China is getting ready to cancel some old-crop soybean shipments from the US in favor of switching to significantly lower-priced new crop South American origins. In any case, the commitment data are only a week old when they are reported, and it’s hard to believe that the Chinese would be loading up only to turn around and cancel orders.
Another potential bearish factor that’s been talked about and that could explain the market’s weakness is traders’ belief that the USDA may have underestimated 2012-13 soybean acreage. Charts 2 shows that soybean prices have been much stronger than corn or cotton. However, soybean planting progress has moved at a torrid pace and is nearly complete. Most of the crop was in the ground before farmers could take advantage by switching crops.
Finally, rounding out the bear case, some estimates for the battered South American crops have improved in recent days.
Nevertheless, the hard fact is that we’re limping out of one season that is ending with a dangerously low carryover into yet another, as illustrated above. The bearish factors, even if all realized, will not significantly change the world balance, which is going to have a sizeable drawdown in ending stocks for 2011-12. Global ending stocks were revised downwards in the May crop report, to 20.9% of usage, down from the April estimate of 22.4% and compared with 27.5% in 2010-11.
All commodities are taking it on the chin, and the prices of some with basically bullish fundamentals are affected as well. We believe soybean prices should move back up to the highs and beyond.
Buy November soybeans. Place initial stops at $1,250 per bushel, close only.