Global soybean supply tightening

by Ron Sterk
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Although 2012 corn data were the most anticipated at the U.S. Department of Agriculture’s Agricultural Out-look Forum in late February, soybeans have been driving the markets most of the time ever since. Projected global soybean production has receded, foreign demand has been active and prices have firmed.
The U.S.D.A. projected U.S. 2012 soybean planted area at 75 million acres, up 1 million acres from its earlier baseline forecast and even with 2011 plantings. But the projected number was 2.4 million acres below 2010 plantings of 77.4 million acres. With average yield forecast at 43.9 bus an acre in 2012, up 2.4 bus from 2011 and the second highest on record if realized, production for the year would come in at 3,250 million bus, up 6% from 2011 but down 2% from 2010.

Of course not a single soybean, or at least any acreage of significance, has been planted yet in the United States. Will farmers be enticed to switch to soybeans from other crops? How much do soybean prices have to rise to “buy” acres from corn, spring wheat or other small grains, cotton, rice or other crops?

Nearby March soybean futures prices climbed to five-month highs around $13.35 a bu the past couple of weeks while corn futures were around $6.43 a bu and spring wheat was around $8.05 a bu. The price spread to corn futures last week was approaching $7 a bu and to spring wheat futures was about $5.25, both about $2 more than on Jan. 12 when the bearishly construed U.S.D.A. annual Crop
Production and monthly World Agricultural Supply and Demand Estimate reports were released.
Corn growers are somewhat limited on switching acres because of commitments to expensive seed, fertilizer and herbicide. Likewise, some also are “prohibited” from planting corn due to crop rotation, needed to give land a rest from nutritionally-demanding corn.

But the key number for farmers is net return (return over variable costs) per acre — which crop will earn them the most. While costs and returns vary for each individual farm, the U.S.D.A. provides projected average annual net returns per acre as part of its long-term projections. According to that data, corn still is king over soybeans and all other major crops.

“Expected returns for corn and soybeans are again historically high reflecting strong new-crop futures and cash forward prices,” the U.S.D.A. said in commentary at its Outlook Forum. “Relatively favorable expected returns for corn compared with soybeans keeps soybean area from expanding. Incentives for expanding soybean planting in 2012 are limited. However, gains are expected in harvested area as abandonment returns to more typical levels in several states that were affected by adverse weather in 2011.”

The U.S.D.A. projected the net return for corn in 2012-13 (the crop planted for harvest in 2012) at $485 per acre, down sharply from a whopping $656 per acre in 2011-12, but 32% above the projected soybean return of $330. While the premium for corn over soybeans is $130 an acre less than in 2011-12, it’s still $155 in favor of corn. Realizing there are a number of factors that limit where soybeans may be planted, there are several other crops with much lower net returns that may be more susceptible to switching, in-cluding oats (projected 2012-13 net return of $70 an acre), grain sorghum ($126), wheat ($142), barley ($199) and cotton ($246). Rice with a projected net return of $461 an acre appears an unlikely candidate.
The market will get a better idea of corn and soybean area when the U.S.D.A. releases its Prospective Plantings report on March 30, but even then the numbers may change before the better estimate is released in the annual U.S.D.A. Acreage report on June 29, when data is gathered after most crops have been planted.

So why have soybeans been the market leader recently? It mostly has to do with South America, the world’s largest soybean producing region and exporter, and China, by far the largest importer.
Extremely dry conditions in Argentina, the world’s third largest soybean grower, and to some extent in Brazil, the second largest producer after the United States, as well as in other South American countries, set the tone for lower-than-expected soybean production for the region and for the world. With the Southern Hemisphere soybean crop now being har-vested, it will soon be known how much damage the weather inflicted on the 2011-12 crop. Even with the detri-mental weather and cuts in production, Brazil may export a record large volume, according to the U.S.D.A.

Globally, the U.S.D.A. projects 2011-12 soy-bean production at about 245.1 million tonnes, down about 7% from a year earlier, and ending stocks at 57.3 million tonnes, down 17%.

At the same time, China has been actively buying soybeans, including more from the United States than is typical for the time of year when it usually is waiting for lower-price South American supply. China uses three to four times its own production of soybeans and accounts for about 60% of global imports.

Even with all the bullish features to the soybean market, U.S. exports are expected to fall about 15% from each of the prior two years, and for the marketing year to date were 25% behind the year-earlier pace as of last week. Domestic crush is forecast to be down 2% from 2010-11 and down 8% from 2009-10, a reflection of easier U.S. demand, and carryover on Sept. 1, 2012, is expected to increase by 28% from 2011 and by 82% from 2010 before declining in 2013.

On the other hand, average prices paid to farmers for soybeans in 2011-12, projected by the U.S.D.A. to range from $11.40@12.60 a bu, may well surpass the record high average of $11.30 a bu in 2010-11 and exceed the $10.10 average of the memorable 2007-08 when prices for many commodities soared to historic levels.

Corn may still be king, but soybeans clearly remain a market favorite.
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