Soy complex prices soar

by Jeff Gelski
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Soybean and soybean oil prices soared this marketing year with futures prices in both markets setting all-time highs during the first trading session of March. In the case of soybean futures, prices surged to a high of $15.96 a bu basis for the Chicago July 2008 future, and 2008 soybean oil futures contracts set highs ranging from 70.85c to 72c a lb. Soybean meal prices surged in sync with soybean and soybean oil prices, with futures prices breaking through recent highs set in 2004 but falling well short of record prices established during the summer of 1973, when President Richard Nixon, out of concern stocks of soybeans would be depleted before that year’s harvest, imposed an embargo on U.S. sales of soybeans and soybean products abroad.

Prices of soybeans and soybean products tumbled from their highs through the rest of March on expectations U.S. producers would greatly expand soybean planted area this spring at the expense of corn and cotton. Those ideas were affirmed with the March 31 release of the U.S. Department of Agriculture’s Prospective Plantings report that indicated U.S. producers intended to plant 18% more acres to soybeans in 2008 than in 2007. In April, soy complex prices reclaimed some ground lost in March as soybean and resurgent corn markets battled for planted acres.

Cash soybean oil prices, Decatur, Ill., were 59c a lb on April 18, up from the recent low of 53c a lb on March 28 and compared with a high of 65.75c a lb on Feb. 29. Soybean oil prices a year earlier were 30.5c a lb. Soy flour prices, Midwest, on April 18 were $24 a cwt, up from a recent low of $22.12 a cwt on March 21 but down from a high of $26.06 a cwt on Feb. 29. A year earlier, the Midwest soy flour price was $16.10 a cwt.

Key to the price surge in soy products prices in 2007-08 was a severe drop in area planted to soybeans last spring. Farmers planted 63.6 million acres to soybeans in 2007, an incredible drop of 16% from a record planted area of 75.5 million acres the year before. Corn usurped the soybean acres as producers eyed a broad expansion in demand of corn for use in producing ethanol.

Soybean production in 2007 at 2,585 million bus dropped 19% from the record outturn in 2006 of 3,188 million bus. The U.S.D.A. projected 2007-08 soybean disappearance at 3,009 million bus, down just 64 million bus from the record 3,073 million bus in the previous year. Heavy domestic and world demand placed on a smaller U.S. soybean supply rapidly drew down stocks. The U.S.D.A. projected 2007-08 soybean ending stocks at 160 million bus, down 72% from the record 574 million bus in the previous year, a remarkable turnabout.

"We started 2007-08 with a record carry-in and will end with a minimal carryout," said Paul Meyers, vice-president, commodity analysis, Connell Co., Berkeley Heights, N.J.

Mr. Meyers noted while U.S. soybean area and production dropped sharply in 2007, there was only a modest increase in South American soybean acreage and outturn in 2007-08. With world demand for soybean and soybean products expanding, world buyers such as China continued to turn to the U.S. for soybean and soybean oil supply in recent weeks even as the South American crop was being delivered to ports. Recent producer protests in Argentina and Brazil over export taxes virtually shut off shipments of soybeans and soybean products from South America, leading to additional demands being made on U.S. stocks.

The U.S.D.A. projected U.S. 2007-08 soybean exports at 1,075 million bus, down only 43 million bus from the previous year. U.S. soybean oil exports were projected at 2,700 million lbs, up 43% from 2006-07 and second only to 3,079 million lbs in exports in 1997-98. Soybean meal exports in the current year were projected at 8,850,000 tons, up 64,000 tons from 2006-07 and the largest outgo since a record 9,330,000 tons in 1997-98.

Domestic demand for soybean oil for use in producing biodiesel fell short of expectations but could not be ignored, said Brian Harris, Global Risk Management Corp. "Biodiesel has been a bust for a lot of folks. Only the biggest producers seemed to be able to turn a profit." Monthly use of soybean oil for biodiesel production reached a high of 376 million lbs in August 2007 and then decreased each month to a recent low of 220 million lbs in December. Usage began to bounce back in January, and in February, 290 million lbs of soybean oil were used for biodiesel production. The U.S.D.A. on April 9 projected 2007-08 soybean oil use for biodiesel production at 2,950 million lbs, up 6% from 2006-07.

Mr. Meyers said the market was somewhat surprised soybean oil usage for biodiesel recently was on the rise given high prices. Even with crude oil well above $100 a barrel, most analysts suggested use of soybean oil for biodiesel production was not profitable unless soybean oil prices were 52c a lb or less.

Both Mr. Meyers and Mr. Harris indicated while the growth in use of soybean oil for biofuel production will be slower than the use of corn for ethanol, it was a factor with which the market will have to reckon for the foreseeable future.

At the same time, domestic use of soybean oil for food was stagnant to declining as no-trans oils increased their share of the edible oils market.

Tightening U.S. and world stocks of soybean oil and other vegetable oils provided the fundamental support to soy complex prices.

"But you can’t say enough about the influence of the index funds," Mr. Harris said.

He suggested when soybean futures prices surged to $15.70 a bu in early March, index fund activity alone accounted for between $3 and $4 of the price.

"In years with similar tightness in world and U.S. stocks, you would have expected $11.50 or $12 a bu to effectively ration demand," he said.

The U.S.D.A. indicated on March 31 U.S. producers intend to plant 74.8 million acres of soybeans in 2008 compared with 63.6 million acres in 2007, drawing acres from corn and cotton. The acreage forecast for the current year would fall shy of the record planted area of 75.5 million acres in 2007. Assuming normal weather, soybean production this year should be much larger than in 2007 and perhaps approach the record outturn of 2006.

Mr. Meyers and Mr. Harris agreed even with a much larger crop, prices will not drop to historical levels anytime soon. Mr. Harris said a new floor has been built into the market, with the low end of the soybean price range likely to be $7.50 to $8.50 a bu until stocks are rebuilt. Soybean oil prices should decline with a larger crop but prices likely will have a floor of 34c to 35c a lb.

"The industry has to get used to a whole new market structure," Mr. Harris said. "At least for the next two or three years, the mindset on what previously was perceived as value for soybeans should be raised at least $2 a bu."

Mr. Meyers cautioned that the reduction in corn acres projected for the current year likely was temporary. Because of the ethanol mandate, corn acres will have to be increased in coming years, and the increase could not but adversely affect soybean acres.

This article can also be found in the digital edition of Food Business News, April 29, 2008, starting on Page 36. Click here to search that archive.

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