According to USDA’s February WASDE report, global ending stocks of soybeans will total 73 million metric tons, or 2.683 billion bushels, in 2013-14, the most ever. Nearly every discussion of soybeans in the media lately refers to large bearish amounts of soybean supplies in South America to the point that it is now considered common wisdom.
However, before we give up all hope on the outlook for new-crop soybeans, I have a nagging question. If there are so many soybeans in South America, why has China bought 1.03 billion bushels of soybeans from the U.S. since November and virtually none from Brazil or Argentina? Wouldn’t you normally find cheaper prices where supplies are abundant?
And, if you were one of many waiting for China to cancel its U.S. sales in favor of South American soybeans, you might want to know that 844 million bushels of those U.S. sales have already been shipped.
Part of the answer to the question is found in the way that USDA tallies its world estimates. For example, in 2012-13, USDA’s world ending stocks estimate was 3.83 million metric tons (mmt), or 141 million bushels, which also corresponds to the domestic ending stocks estimate for the U.S. crop year. The ending stocks estimates for Brazil and Argentina, however, are based on an artificial October-to-September year and therefore reflect mid-year estimates of their soybean stocks at the end of September. As you can imagine, these mid-year numbers are much larger than the actual ending stocks that occur four months later for Brazil and six months later for Argentina.
For that reason, USDA’s world estimates don’t really give us an accurate picture of whether South American soybean supplies are plentiful or not. However, we can see from China’s behavior that U.S. soybeans have offered the better deal for the past several months.
To find out more, I asked DTN South America Correspondent Alastair Stewart for help. He pointed to estimates from the private consultant, Safras e Mercado, which showed 1.42 mmmt (52 mb) of ending soybean stocks on Jan. 31, 2014, in Brazil and estimated ending stocks of 1.97 mmt (72 mb) on March 31 in Argentina. Their old-crop domestic ending stocks-to-use ratios were 1.7% and 4.1% respectively, both very tight situations. The record harvests expected early in 2014 are estimated to increase the ratios for Brazil and Argentina, to 7.8% and 5.9% respectively, but still not what we would call excessively large surpluses.
Yes, this year’s large South American crop will have a bearish influence, but the popular notion that 2014’s record harvest is coming on top of already abundant supplies is wrong. The fact is that both South America and the U.S. need more production in 2014 to keep up with growing world demand, which USDA says is coming entirely from China.
If the U.S. does not come up with at least 3.5 billion bushels of soybean production in 2014, we will see another bullish year for soybean prices, and that is probably why CFTC’s latest report shows noncommercials holding their largest net-long position since late October 2012.
In the longer run, the bigger risk for soybeans comes from China where information is more difficult to obtain. The surge in U.S. soybean exports since October has been unexpected with China accounting for 65% or more of the U.S.’s 1.58 billion bushels of soybean export sales in 2013-14. If the demand is genuine, that is bullish news for soybeans, but it is fair to wonder how long China’s economy can keep up its hot streak. The soybean market is so vulnerable to changes in China that a one-year hiccup in demand would give soybean prices a serious case of bear flu.
At present, the early fundamental outlook for new-crop soybeans remains bearish, based on expectations for a record harvest from South America and the anticipation of increased U.S. plantings this spring. However, there is plenty of risk ahead and the bullish situation of tight soybean supplies on the old-crop side has started to pull new-crop prices higher. So far, November soybeans are still in a downtrend, and new-crop spreads are not showing concerns from commercials about obtaining supplies in the fall, but this deserves watching.
Stay tuned to DTN for more updates on this year’s soybean market — things could get volatile.