Grains, Soybeans: Opposing Forces
Jobman, Darrell, Modern Trader
U.S. soybean production suffered in the August heat while demand has remained strong, meaning another year of price rationing. But watch out for South America. Grains, meanwhile, aren't giving bulls much inspiration.
What looked like a banner year for U.S. crop production in mid-summer turned into not exactly a bust but well below the optimistic expectations for the first soybean crop of more than 3 billion bushels.
Perhaps nothing summarizes the 2003 season better than the Pro Farmer Crop Condition Index charts, which portray how a hot and dry August changed the season around over a wide area of the Midwest, especially for soybeans (see "Taking a dive," right). At the time when crops normally are "made" going into harvest and traders typically begin to focus on demand for the new season, the market was still paying much of its attention in October to the size of the crops it has to deal with this year.
Weather was favorable until corn got through its key pollination period in July and set records for yield and production, but soybean prospects shriveled in the August heat. Many growers were disappointed to see yields decimated by fewer beans per pod, small bean size and the effects of heavy damage by sap-sucking aphids. As a result, supply/demand estimates have shifted from a year for rebuilding stocks to projections for another tight carryover, and traders have seen the highest prices in years.
REALIZATION SINKS IN
For soybeans, this has been a "realizing" year for prices. First, total output in 2002 was good but not excellent as a bumper crop in Iowa was offset by poor yields in the eastern Corn Belt as demand stayed strong. Traders expected that export shipments from the United States would diminish when Brazil's harvest began in March/April. When they realized U.S. exports were holding up and would easily surpass season estimates, even after Brazil's huge soybean crop became available, prices moved above the $6 per bushel level in April to the highest point since 1998.
Second, after getting a late start with a cool, wet spring, the 2003 crop benefited from good weather that had everyone thinking about a big crop in June/July and prices slipped toward $5 a bushel. Then came August. When traders began to realize that the lack of rain, 100-degree heat and aphids were taking a toll on pod setting and filling, soybean prices began to rise again, reaching $7 a bushel in early October at a time when harvest usually is putting pressure on prices. In fact, as crop condition and yield reports came in, soybeans exhibited the type of volatility usually associated with a weather market in July or August.
The bullish case did get one setback from production, but it had nothing to do with the 2003 crop. In its quarterly stocks report on Sept. 30, the U.S. Department of Agriculture (USDA) revised the size of the 2002 crop from 2,730 million bushels to 2,751 million bushels, boosting the carryover estimate from 140 million bushels to 169 million bushels. Traders expected less usage due to a dwindling supply but were surprised by the size of a production adjustment months after the USDA should have had a good handle on the 2002 crop.
That turned out to be a minor bump in the road, however, when the USDA released its October crop estimates showing soybean yields averaged only 34 bushels per acre and production was only 2,468 million bushels, the smallest crop since 1996 when prices reached $9. Even before the October report made it "official" by reducing carryover estimates to 130 million bushels, the U.S. soybean situation looked very tight for 2003/04, according to Jerry Gidel, grains analyst for North America Risk Management Services Inc. in Chicago. He sees ending stocks dropping to 115 million bushels and the stocks/use ratio falling below the levels of 1996/97 and even those of the mid-1970s (see "Where are the beans?" above).
But that doesn't mean soybean prices will hit $9 again or that traders will see "beans in the teens. …