Soybeans: Can South American output fill the gap?

August 21, 2012 06:45 AM

The U.S. soybean market entered the punishing drought of 2012 with a bullish backdrop. First, analysts expected a significant amount of soybean area to be lost to corn planting. In addition, overseas demand was very strong. Then came the heat and dramatic crop losses, dwarfing the bullish impact of smaller acreage and demand.

The August crop report showed that the average yield for the 2012-13 US crop dropped to 36.1 bushels per acre (bpa), down from the July estimate of 40.1 bpa, which was already slashed from the 43.9-bpa June estimate. The August estimate was below analysts’ estimates of 37.753 bpa. The market rallied on the report, but failed to take out the late-July highs (Chart 1).

As it turned out, acreage was not a bullish factor. New-crop soybean prices were depressed vis-à-vis corn when early planting intention estimates for the 2012-13 crop surfaced (Chart 2, next page). In March, the USDA estimated US soy area at 73.9 million acres, which would have been down from 77.4 million acres and 75 million acres in 2010-11 and 2011-12, respectively. Then – between January and May, long before there was even a clue about the drought and its magnitude –soybean prices rallied in time for farmers to beef up soy intentions. The June 29 planting intentions estimate jumped by over 2 million acres, or 3%, to 76.1 million acres, without compromising any corn area. With acreage near all-time highs, soy area ceased to be a bullish factor at all. Once the drought began, though, the extra acres made no difference at all as bean prices shot right past the 2008 highs.

Rising prices have softened overseas sales to a degree, but thus far we have not seen any serious demand rationing, at least not to the extent that we saw in the corn market (see Focus on Futures, August 15). The export sales target for the outgoing 2011-12 marketing year will be missed by a relatively small margin. Shipments stand at 35.2 million tons against the USDA estimate of 36.74 million tons with three reporting weeks remaining. Weekly shipments have been averaging 450,000 tons, which would leave sales shy of the target by about 200,000 tons.

Looking ahead, the USDA cut the forecast for new crop sales by 7 million tons, or 19%, to 30.21 million tons. Not necessarily because the demand will not be there, but because if output estimates are correct, every last soybean in the US would have to be sold to maintain export trends of recent years.

In fact, at 16.24 million tons, new-crop commitments are ahead of same-time-last year sales by a wide margin of close to 6 million tons. Just this past week, US exporters sold 925,000 tons, more than half of which was purchased by China. So with any decent pace of continued exports, the US will come as close to running out of soybeans as it ever has. Ending stocks as a percentage of consumption will fall to 4.2%.

It all sounds like a very compelling bullish case. The US is no longer the supplier of last resort, however, and if Brazil and Argentina can avoid crop problems, the market will not be as tight as it feels from dwelling only on the US crop and the drought.

The past two seasons have seen Brazil and Argentina alternate crop failures. Even so, together the two countries harvest more beans than the US. If early estimates, which at this point are obviously based solely on planting intentions, are anywhere near accurate, the global soybean market should be amply supplied.

In the August crop report, the USDA raised its estimate for 2012-13 Brazilian output by 3 million tons from the July estimate, to 81 million tons, compared with 65.5 million tons in 2011-12. Argentinean output is forecast at 55 million tons, up from 41 million tons  this past season. Combined production of 136 million tons is up from 106.5 million tons and 124.5 million tons in 20011-12 and 2010-11, respectively. The downwardly revised US crop, by contrast, is now estimated at only 73.27 million tons, down sharply from 83.17 million tons in 2011-12. If all goes well, South American output will compensate for the U.S. crop failure.

The estimate for 2012-13 global ending stocks as a percentage of consumption fell to 20.77% of usage, down from the July estimate of 21.15%, and actually a bit higher than last year’s 20.46%. This is the low end of the range of recent years, but just to provide perspective, ending stocks during the bull market of the mid-1990s saw global inventories fall to as low as 12% of usage.

 The bullish case is obvious. The bearish case is that the Chinese will eventually become price conscious and if South American crops do not disappoint, the global picture is not quite that tight.

 Prices are likely to move higher in the near term, while there is still uncertainty about the size of the US crop. Remain long November beans. Raise stops from $13.80-per-bushel, basis November, to $15.40, close only.

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