The USDA estimate for combined 2012-13 Brazilian and Argentinean output is 136 million tonnes, up from last season’s 107.5 million tonnes. Some analysts have suggested that farmers will go wild because of high prices that would leave them with extraordinary profits and have come up with a “leap frog” forecast of 150 million tonnes. Aside from the potential weather issue, it is doubtful that the infrastructure for planting, cultivating, and transporting that kind of volume exists in either Brazil or Argentina. Brazil has been working on modernizing its highway network, but that will certainly not be in place for moving the 2012-13 crop to market. The USDA estimate is much more realistic. Last year’s crops were plagued with weather problems, but a year earlier the combined crop reached 124.5 million tonnes.
The other potential bullish factor is demand. Unlike many other commodities, sticker shock has not been a factor – yet. US export commitments stand at 21.4 million tonnes, well above last year at this time when sales were only 15 million tonnes. The USDA actually lowered its estimate for 2012-13 exports by 1.5 million tonnes, or 5%, from its August estimate, to 28.71 million tonnes. This compares with last year’s final sales of 37.01 million tonnes. The USDA estimate is more of a reflection of how much the US can sell, rather than demand.
Global ending stocks for 2012-13 are currently forecast at 53.1 million tonnes, or 20.6% of usage. That’s right on the border – anything lower than that has sparked multiyear bull markets in the past. To be sure, the US crop will still be significantly below the average of the past few years, even with the improved weather.
When prices approached $18 per bushel, however, the market was pricing a total disaster. Any further reduction in yield would have sent US ending stocks below 100 million bushels. With a more optimistic outlook for the crop, the market is now re-pricing the drought’s impact on soybean supply. The size of South American crops is important and the extent of weather related problems is not yet known. In all likelihood, with the expansion of acreage, production should still be sufficient to compensate for the US crop – even with some weather problems.
Still, unexpected strong demand and the South American situation remain strong variables. Remain long. Maintain stops recommended on Aug. 31at $15.40, close only.