Soybean Bulls vs. Soybean Bears

Production Worries: Strong bull markets of the past have often been the result of drought. Rainfall in the Eastern Corn Belt, especially in Illinois, has been below normal. Recent rains relieved some, but not all, of the stress and with dry weather back in the forecasts the market appeared to ignore the recent rainfall. Drought conditions could lead to reduced soybean production from poor yields and dry weather also enhances worries about soybean aphid damage. However, not all areas are dry and generally the crop is off to a good start, normally a bearish market factor. While it is early in the growing season, Monday's (6-13-05) USDA crop condition reports suggests a soybean crop in good condition that has potential to exceed trend line yields.

Asian soybean rust continues to add to uncertainty. So far the disease has had no impact, apparently contained to Florida and Georgia where it over wintered without any signs of spreading. Tropical storm Arlene brought predictions that the winds could have spread rust over much of the Southeastern states and even the lesser possibility of some Corn Belt states including Southeast Missouri. However, others quickly pointed out that rust spore production was probably very low with little to spread and rains may have further limited the spread of the disease into the atmosphere. While the risk is there, spreading of rust and the extent of the any outbreak, or how successful control measures might be, is yet to be confirmed.

Demand: USDA increased 2004-05 soybean domestic crush and export estimates in the June 10 supply/demand reports, another positive market signal for the bulls. Crush has been running above expectations and bulls expect that USDA may have to increase the crush estimate even more. Ocean shipping rates have softened somewhat and China continues to import soybeans, keeping exports running above previous expectations. The bears can counter that higher prices will eventually slow crush. South American soybean supplies are available for export competition and they will still have large supplies available when the 2005 U.S. crop is harvested. Additionally, there are rumors that Chinese crush margins are poor and they may have to slow soybean imports.

Carryover: Production (or lack of it) determines new crop supplies, but old crop (2004-05) domestic supplies are more than adequate to meet current demand. Although USDA old crop carryover estimates have declined from previous estimates, which the bulls take as a positive market signal, projected ending stocks of 320 million bushels are the 3rd largest in more than 15 years. World soybean ending stocks estimates have also declined somewhat, which contributes to the price rally and was due primarily to a second year of disappointing production in Brazil. In spite of the decline, world carryover remains at record high levels and Brazilian production is expected to rebound in 2006. The bears are correct that neither the U.S. nor the world will run out of soybeans this year. However, the market bulls recognize that it doesn't take much reduction in expected U.S. production to quickly tighten domestic 2005-06 soybean supplies. Besides yield related production reductions, there also is concern that actual soybean planted acreage may be less than planting intentions suggested. Good planting weather may have added to the shift of soybean acres to corn and wet weather in the Northwestern Corn Belt may prevent some acres from being planted.

The bottom line is that the soybean market is a high risk speculative market! Price and market action seems to be ignoring relatively large carryover supplies and a 2005 crop that is, at least, off to a good start. The price uptrend is based on speculation about the possibility of production problems and the potential to tighten domestic soybean supplies. USDA's June mid-point average estimate for 2005-06 soybean prices is $5.45. November 2005 soybean futures prices have pushed through $7, which represents about $1.50 in "risk premium" for potential problems that may or may not actually reduce production. The strength of soybean prices has been surprising to most analysts and now several believe they will go even higher. But it is very risky. When a weather market reverses, it also usually is a surprise and the price decline often happens quickly.

It is difficult to make marketing decisions during a speculative bull market, such as is occurring now. Weather, rust, and aphids are real threats to production and no one knows how high prices may go. Until weather forecasts change or the impact of the rust threat becomes known, technical (chart) signals and market psychology suggest the rally may continue. Nobody wants to sell if prices are going much higher and the bulls have appeared to win the battle during the past month, but history says they won't always win. A few facts that might help keep things in perspective. November soybean futures prices have been above $7 at harvest time (October) in just 3 out of the last 20 years. They have been above $8 only once. Regardless of how high soybean prices might go, historically current prices represent a marketing opportunity that could slip away quickly. Remember, if the "worst sales" of the year are made at $7 plus futures prices, it is likely going to be a very good year!

It's Hard to Be Bullish on Corn

The uptrend in soybean prices and the fact that it is dry in the heart of the Eastern Corn Belt is providing support to the corn market, but burdensome supplies make it difficult to be bullish about corn prices.

USDA's June supply/demand reports made no changes in U.S. Corn estimates. The projected large 2004-05 corn ending stocks of 2.215 billion bushels is expected to increase to a more burdensome 2.540 billion bushels in 2005-06. These estimates are based on USDA's intended corn planted acreage of 81.4 million acres and slightly above trend line yields of 148 bpa. Some analysts believe the actual acreage may be even higher, which could add more bushels to production and ending stocks estimates. The June 30 USDA Planted Acreage Reports, along with weather and crop condition reports, will be watched closely for clues on changes to supply/demand estimates for 2005 corn and soybean production.

Corn prices may "tag along" with the soybean price uptrend, but huge carryovers provide a "big cushion" for corn demand and ease production worries. Although there have been dry weather concerns, the crop was planted early and is off to a good start. Monday's (6-13-05) corn condition report suggests that above trendline yields remain a possibility. Unless the dry conditions in the Eastern Corn Belt become widespread, causing a severe drought, it seems unlikely that corn production will be reduced enough to tighten supplies to worrisome levels.

USDA's 2005-06 projected corn price range is $1.55 to $1.95. December 2005 corn futures prices have rebounded with the soybean price rally and may again reach or exceed the March high just below $2.50. Prices at this level, coupled with the potential for counter cyclical payments (CCP) and loan deficiency payments (LDP), could offer profitable corn prices and suggests sales opportunities on a portion of new crop production.

Harvest Pressure for Wheat

USDA's June wheat supply/demand projections, while not necessarily bullish, may be somewhat encouraging. Old crop (2004-05) food and export use was increased 14 million bushels, which reduces the 2005-06 beginning stocks from the previous estimate of 541 million bushels to 527 million bushels. New crop wheat production estimates were also lowered, resulting in projected new crop ending stocks of 619 million bushels compared to the previous estimate of 678 million bushels. This is still an increase over the 2004-05 ending stocks of 527 million bushels.

These supply/demand changes, along with the soybean bull market, may provide some support to wheat prices. The winter wheat crop has been affected by frost and dry weather. Now, rain in the western wheat areas also could delay harvest and cause additional yield reductions. However, as the peak of harvest approaches, it may be difficult to achieve a sustained rally in wheat prices. The strength of any post-harvest rally may depend on weather and what happens in the corn and soybean markets. If planning to store wheat in anticipation of capturing a post-harvest price recovery, watch basis at harvest time. In Missouri, wheat basis often weakens from July into September. Unless harvest time basis is very weak or long-term storage (6 months or more) is planned, this often makes selling at wheat at harvest and re-owning on paper a reasonable alternative to storing wheat.