grain analyst - 2014 soybean outlook - december 2013
DESCRIPTION
Grain analyst - 2014 soybean outlook - December 2013 INTRO As the calendar turns from 2013 to 2014, the soybean market set-up is very similar to where it was last year at this time, but our forward outlook is different. This report is designed to bring you - producer, processor, trader or market observer - up to speed on the fundamental factors affecting the soybean market in 2014 and how we at Grain Analyst would approach them. Just like Adam Smith’s invisible hand helped corral the corn bull market of recent memory, we look for similar action to occur in soybeans over the 2014 growing season and 2015 marketing year. High prices during the United States’ (U.S.) pre-season planning will dictate that marginal producers, who have the ability to plant soybeans, do so at the expense of crops like corn. This will result in soybeans being planted at a record pace in both the U.S. and South America, bringing prices down from the historically high levels we have seenin recent years. Price action resulting from this should bring relative price value relationships between crops back in line with historical averages, after extended periods of being away from average levels. We hope this report will set the table for the story that will be the 2014 soybean crop year.TRANSCRIPT
2014 soybean Outlook
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2014 soybean Outlook
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INTRO As the calendar turns from 2013 to 2014, the soybean
market set-up is very similar to where it was last year at this
time, but our forward outlook is different. This report is de-
signed to bring you - producer, processor, trader or market
observer - up to speed on the fundamental factors affecting
the soybean market in 2014 and how we at Grain Analyst
would approach them.
Just like Adam Smith’s invisible hand helped corral the corn
bull market of recent memory, we look for similar action to
occur in soybeans over the 2014 growing season and 2015
marketing year. High prices during the United States’ (U.S.)
pre-season planning will dictate that marginal producers,
who have the ability to plant soybeans, do so at the expense
of crops like corn. This will result in soybeans being planted
at a record pace in both the U.S. and South America, bringing
prices down from the historically high levels we have seen
in recent years. Price action resulting from this should bring
relative price value relationships between crops back in line
with historical averages, after extended periods of being
away from average levels. We hope this report will set the
table for the story that will be the 2014 soybean crop year.
DEMANDWhen analyzing demand for soybeans, we only need to look
in one place - China. Chinese domestic demand grew almost
5% between this year and last year. In the last decade,
Chinese domestic soybean use has grown by over 100%.
We expect demand to remain robust for years to come, as
more Chinese citizens change their diet to a higher protein
base. China increased their projected import demand for the
2014 year by almost 13% from just fewer than 60 MMT (2.2
billion bu) to above 69 MMT (2.5 billion bu). They are looking
to replenish the reserves they used in 2012-2013 and meet
consumption growth.
Continued export demand out of China will be needed for
soybean prices to maintain their current stature in the grain
and oilseed hierarchy, because U.S. demand is static and will
remain static due to an aging U.S. population and changes
in diet (less animal protein intake). While China is raising
domestic use, American use has come down since 2009 and
has been essentially flat over the last decade. Unlike corn,
where new domestic uses have been discovered and pushed
into the mainstream, U.S. soybean markets have been driven
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mainly by crush demand and exports since 1999. Growth in
the soybean business can be directly attributed to export
growth in China. At the turn of the 21st century, almost 60%
of all soybeans produced in the U.S. were used domestically.
By 2009, that number had fallen to just above 50%.
Prices have traded between $8-18 since 2009 and U.S.
domestic use has not changed year over year. This points to
the inelasticity of soybean demand right now in America, and
we do not see it changing this year. Based on the belief that
China will keep exports near current levels, we do not believe
we will see a demand-side driven rally in 2014.
PLANTED ACRESWhile 2013 saw U.S. farmers plant just below a record
amount of soybean acres, soybean prices have still signaled a
need for more. The corn and bean shortage that came about
from a stretch of sub-par growing seasons between 2010
and 2012, resulted in record high prices in each market.
Both markets were screaming for more production. Corn
won out in 2013 and planted a record crop. Our experience
indicates that corn farming is preferred by producers who
can grow both. Even as bean prices were demanding more
supply, planted acres were lower than needed because corn
prices were high, and more farmers chose to chase high
prices in corn than beans. This will not be the case in 2014,
as projected soybean plantings are expected to break an all-
time record by as much as 7 million acres. The last record for
planted soybean acres came in 2009, at just above 77 million
acres. In 2014, because of low corn prices, we expect 82
million acres to be planted in 2014, an increase of 7%.
The U.S. marketplace is not alone in its efforts to replenish
supply. America has a new partner/competitor in both Brazil
and Argentina, who have joined domestic efforts to feed the
world with soy protein in recent years. Farmers in Brazil
have been expanding soybean acreage for decades. In 1995-
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96 Brazil harvested nearly 11 million hectares of soybeans
(27 million acres). This year, total Brazilian plantings are
projected at 71+ million acres. Argentina will plant almost 50
million acres themselves. Between Brazil and the U.S., soy-
bean acreage is expected to be in the mid-100 million acre
range, up over 50% in the last 20 years. Throw in Argentina’s
50 million acres and we estimate total planted acres across
the three soybean superpowers near 210 million.
SUPPLYThe starting point for the year (called the carry-in) sits at 160
million bushels, with a usage rate of just over 5%. This means
that the supply left over after everyone bought this year, is 5%
of what we need to meet to match next year’s demand. Think
of it as leftovers we will use toward next year. The U.S. needs
to produce 95% of the soybeans they plan to sell in the 2015
marketing year over the next growing season. In Lehman’s
terms, the bean market has been living paycheck to paycheck.
This will put a lot of pressure on price as any future supply
disruptions occur, which will make beans a very fast market.
Supplies will remain tight until one of two things happen:
1. Export demand falls – U.S. domestic demand has been
very inelastic since 2009. To expect a change in U.S.
use, either up or down, would be misguided. So too
would an expectation of increased interior demand
from South American countries. Brazil and Argentina
are fantastic at growing soybeans, but they do not
have the ability, or infrastructure, to do much with
them “in country”, yet. Any fall in export demand will
really hurt South American markets for this reason.
2. Supplies Increase – The supply side is more flexible in
the short term, especially now that the corn crunch
appears to be in the rear view mirror as more acres go
to beans. As corn prices have come down, corn pro-
duction margins have come down as well. This factor
increases farmers’ desire to plant beans, if possible.
Producers should chase higher margins and increase
bean acres, which will increase overall production,
eventually leading to more U.S. supplies.
We think it is pretty clear; number two is the more probable
scenario this season. Both could happen, but we doubt it.
Chinese macro-problems are worth watching, but at this
point things appear to be stable. Without a crash there or in
other major macro markets, do not expect to see number one
anytime soon.
The result of the second scenario will have a negative effect
on soybean prices; the odds of this go up drastically if the U.S.
soybean acreage picture crystallizes like we believe it will.
Below is the supply/demand chart for U.S. soybeans in 2014.
Our focus should immediately go to the stocks-to-use line
for the end of the 2014 growing season. If 82 million acres
go into the ground, and producers yield like they did this year
(43 bpa), the total production for the U.S jumps +300 million
bushels from +3.2 billion bushels to +3.5 billion bushels. If
demand remains constant, the carry-in for next year will go
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from 160 million where it is now with 5.5% stocks/use, to
north of 450 million. The result will have the U.S. bringing
the third largest supply relative to demand since 1987, only
trailing 2005 and 2006.
On a relative level, we think this would bring U.S. soybean
prices back into line or even below the 2.2 ratio it has had
with corn over time. With U.S. corn, average price projec-
tions for 2014 are coming in near $4.25. The average corn/
bean ratio would put bean prices below $10.00.
The takeaway we want all readers of this soybean report to
have is that the results of high prices and high profit margins
are eventually, higher supplies. Soybean producers would
be wise to look at what was successful in 2013 corn market-
ing. The tight carryout currently on hand should keep the
soybean market inverted for much of the Q-1 2014 (cash
prices higher than deferred futures) while we wait for new
product from south of the Equator. The price action during
the second part of the year going into 2014 U.S. harvest, will
depend on whether or not South America had a successful
soybean harvest and ultimately what the domestic crop is
projected to look like.
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If one of the two variables from the supply section would
occur, we project U.S. CASH soybean prices to trade be-
tween $10.50-13.50 per bushel during the 2014 marketing
season. We expect to see prices trade at the high end of
that range early in 2014 and getting cheaper as time goes
on. As harvest takes shape in the late summer, we project
price to fall into the low end of that range as a successful
harvest approaches.
We expect November new crop futures to trade between
$9.00-12.00 per bushel throughout 2014. Much like cash
soybeans, we expect a slide in price after South American
harvest and U.S pod setting, if successful. Using 2013 yields
and an 82 million acre soybean planting number, we expect
prices to be near the bottom of that range at harvest.
YOUR ACTIONBased off this analysis, we recommend that an early market-
ing approach is considered for producers. Traders should
expect negative price action to dominate, as one of those
scenarios would become probable. The past 5 years, soy-
bean producers and planning boards across both continents
have done a good job of increasing acreage when needed.
We feel the acreage increase part of the cycle will come to
an end over the next growing year. Between the U.S. and
Brazil/Argentina, the supply side of the equation will grow
faster than ever before with a decent crop, while the demand
side will be slower to adjust upward. When this occurs, it is
“price” that cuts production, which we feel will be needed in
2015. The only way that is done is by reducing price below
variable cost to dis-incentivize planting. One can witness
this right now in the corn markets. Corn now finds its shoe
on the other foot, looking to cut production from its histori-
cally high plating levels of the past two seasons.
We want all readers to understand, all analysis is based off
a normal growing year assuming yields come in near trend
expectations. We follow these markets every day and expect
the soybean story will come with plenty of rumor and innu-
endo on both the supply and demand sides, factors which
conspire to keep volatility at the high levels we have seen in
recent years. Supply worries can turn into $1.00 or $2.00
rallies. That said, over recent years, U.S. producers have
proven their ability to raise a crop under very poor circum-
stances. One should approach any year with the assumption
the market will see close to a trend yield, not plan for crop
failure. With that in mind, rallies need to be used as selling
opportunities, not times to lift hedges. To maintain a suc-
cessful risk management program in a market like soybeans,
one needs patience and proper risk management. This can be
achieved through personal experience or teaming up with an
experienced advisor who can get you to understand what to
expect from managing risk or trading in these markets.
The best cure for high prices is high prices. Like every other
situation in life where free market factors are at play, we ex-
pect to see the result of high prices to be higher production, as
producers chase dollar signs. The real question now gets put
to you the producer/soybean trader, what do you do about it?
Subscribing to Grain Analyst would be a good place to start.
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