August 22, 2014
Bountiful bean stalks, prolific palm trees and deflating market fundamentals
Ultra low old crop supplies and a record shattering harvest leads to wide trading spreads. With large coincident soy, rapeseed and palm harvests on the way, oilseeds prices will soften.
by Eric J. BROOKS
An eFeedLink Exclusive Commentary
Soybeans have fallen 31% in three months and it currently trades near US$10.40/bushel, slightly below levels last seen in late 2011. Moreover, while exceptionally tight pre-harvest US inventories supported prices through the first nine months of 2014, market support will begin disappear shortly after this article is published.  
Scarce old crop + huge new crop = large spreads
In fact, at 3.8 million tonnes, US soy inventories as of August 31st were almost as low as during the 1970s, when world soy demand was much lower than it is today. With pork and poultry production turning strongly profitable, rising summer time feed demand led created wide spreads between cash soy and late year futures.
In late August, Illinois cash soy beans were selling for US$12.64/bushel. This was 21.8% or US$2.28/bushel more than November futures (which expire when this year's soy harvest will be fully inventoried). After mid-August, many trading days saw cash or September soy gain 3 times in price during rally days or suffer only a third of November soy's losses on days when prices fell. That reflects the market stress caused by America's exceptionally low old crop supplies.
By the early fourth quarter, a record harvest will triple or even quadruple closing US soy inventories.  In six weeks, regional soy deficits will turn into a ubiquitous, nationwide abundance. Consequently, the late third quarter's unusually, large pre-harvest spread between cash soy and futures will dramatically narrow. By the second quarter of 2015, cash soy could sell at a discount to August 2015 CBOT futures, as that pre-harvest period will anticipate the dwindling of late 2014 and early 2015's oversupply.
While CBOT futures will fall by less than cash soy, overall prices are poised to drop significantly below their already deflated third quarter levels. Barring a disastrous South American harvest, by next spring, soy could revisit the US$9/bushel level seen in the aftermath of the late 2000s financial crisis.
These soy supply, cash price and futures forecasts were have their origins in the second quarter. At that time, the soy:corn price ratio peaked near 3.3; just in time for the start of America's crop planting season. The resulting massive shift in US farm acreage from corn to soy was thereafter followed by idyllic growing weather.
Lots of deflationary momentum
From last year's 89.5 million tonnes, 2014's soy crop was initially estimated at 98.9 million tonnes, before flourishing crop yields forced the USDA to revise its projection to 103.9 million tonnes. This easily exceeds the 91.7 million tonne record set in 2009 but the actual harvest is expected to be even larger. With market fundamentals swiftly shifting from shortage to surplus, deflationary momentum is building.
Moreover, there are three other factors that are destined to drive soy below US$10/bushel and perhaps force it to even fall below US$9.00/bushel.
First, the USDA conservatively estimated a record 46.4bushel/acre soy crop yield but ground level observers believe actual yields should equal or exceed 47bushels/acre. That could push the US soy harvest above 105 million tonnes and closing inventories over 13.1 million tonnes. It would be the highest US soy closing inventory since 15.6 million tonnes in 2006 –the year before US inventories plunged and five years of volatile feed cost inflation began.
Instead of rising from 4.1% to 12.2%, a 47bushel/acre yield would see the US closing stocks-to-use ratio going to 13.5%. With China, Brazil and Argentina already possessing soy stocks-to-use ratios ranging from 16% to 35%, a quantum increase in American soy inventories will put a lid on the market.
Second, this rapid rise in US soy inventories is boosting a worldwide trend of surplus beans. While corn inventories will have risen 37% from 2012-13 through the end of 2014-15, soy stocks are on track to jump 50% over the same time. This clearly implies that soy is now more oversupplied than corn.
It follows that market signals will move acres transferred to soy cultivation over the last growing season back to corn farming. For that to happen, the soy:corn price ratio must fall below 2.5. Assuming corn stays range bound between US$3.50/bushel and US$4.00/bushel, the restoration of corn growing acreage will require a downward adjustment in soy prices. This implies that after America's record crop is harvested, CBOT soy will trade under US$10.00/bushel and possibly as low as US$8.75/bushel –at levels last seen after the 2008-09 financial crisis.
Third, when Chinese soy import volumes exceeded 94% of world inventories, soy tends to rally. When the ratio slips below 90%, the soy market usually deflates. According to USDA statistics, China's soy imports have fallen from 105% of world soy inventories in 2012-13 to 85% in 2014-15.
Fourth, for the first time since its livestock sector was liberalized in the early 1980s, China is suffering two consecutive years of stagnant, falling feed output. Absorbing 66% of world soy imports, China has transitioned from boosting soy prices to having a deflationary effect.
Finally, with Southeast Asia's expected mid-year drought never materializing, soy is getting no support from palm oil. In fact, since peaking at RM2,910/tonne (US$915/tonne) in March when an early year drought ended, palm oil has fallen by 30%, to RM2,035/tonne (US$640/tonne). With plentiful, ongoing rainfall, Malaysian and Indonesian palm oil output are slated to rise 4.9% and 8.1% this year, with increasing potential for production to exceed these projected increases.
Coming into 2014 with larger supply overabundance issues than soy itself, other parts of the oilseed complex offer no market support. With America's record harvest creating an oversupply situation in the only market that had tight soy supplies, the king of the oilseed complex has nowhere to go but down.

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