Prepared at University of Illinois

Soybean futures rallied by more than $1.00 per bushel in the first two weeks of October, quite a feat in the middle of the harvest of a record large crop. The price increase was fueled by both commercial and speculative buying on the basis of an extremely high rate of domestic crush and export sales, concerns about the Asian palm oil crop, and the USDA's smaller than expected October crop estimate.

The USDA now estimates the 1997 U.S. soybean harvest at 2.722 billion bushels, 339.5 million larger than the 1996 harvest, but 24 million less than estimated in September. Prospects of a record level of consumption will prevent a build-up of year ending stocks to price depressing levels. South America has the potential for a 10 percent increase in production, to a record level of 1.65 billion bushels, but those prospects are currently being overshadowed by the high rate of consumption and worries about potential production problems associated with the El Nino weather pattern.

The USDA projects the marketing year average price in a range of $5.75 to $6.85, but prices are currently well above the upper and of the range. Prices are not expected to follow a typical pattern of a large crop year–low early and then gradually increasing through the year. Instead, prices are expected to continue on a roller-coaster pattern, with a marketing year average near $6.75 per bushel.

The 1997 soybean crop is now estimated at 2.722 billion bushels, 14 percent larger than the 1996 harvest and 8 percent larger than the previous record crop of 1994. Even so, the crop is 24 million bushels less than estimated in September and smaller than generally expected by the market.

The U.S. average yield is estimated at 39 bushels per acre, down 0.3 bushels from the September estimate and 2.4 bushels below the record yield of 1994. The average yield is expected to fall right on the 10-year trend value for 1997. The highest average yield is expected in Iowa, at 48 bushels per acre. The average yield is estimated at 44 bushels in Wisconsin, 43 bushels in Illinois and Ohio, 42 bushels in Indiana, 41 bushels in Nebraska, and 40 bushels in Minnesota. The lowest yields are expected in Georgia and South Carolina, at 20 bushels per acre. Production in the western Corn Belt is expected to be about 196 million bushels larger than last year's crop, while production in the eastern Corn Belt is up 122 million bushels.

There is a tendency for the November production estimate to exceed the October estimate. That has occurred in 16 of the last 25 years. However, in the 10 years when the October estimate has been lower than the September estimate, the November estimate has been smaller 4 times, larger 4 times, and unchanged 2 times. There is no strong evidence to expect a significant change in the production estimate in November of this year.

September 1 stocks totaled only 132 million bushels, the lowest level in 24 years. With a crop of 2.722 billion bushels and imports of 5 million bushels, the supply of soybeans for the 1997-98 marketing year totals 2.859 billion bushels, 405 million above last year's supply and 128 million above million above the previous record supply in 1994-95.

The domestic soybean crush continues to be driven by soybean meal demand, as soybean oil remains in surplus. Oil supplies, however, are tightening as both domestic use and exports are increasing. For the 1996-97 marketing year, the USDA projects domestic meal consumption at a record 27.165 million tons. That estimate may change a little depending on the official Census Bureau estimate of the September crush and August and September exports. For the current marketing year, domestic meal consumption will be supported by expanding pork and poultry production. The USDA projects that production of pork will increase nearly 9 percent in 1998, while poultry production is expected to increase by about 6 percent. Beef production is expected to decline by 2 percent, and overall, feeding rates may be reduced due to reduced profitability of livestock production. At this juncture we project a 4.5 percent increase in domestic meal consumption, for a total of 28.4 million tons. That is 100,000 tons above our projection made in July and 200,000 tons above the current USDA projection.

Sales of U.S. soybean meal for export during the current marketing year have started at a rapid pace. As of October 2, 2.86 million tons had been sold, compared to 1.27 million tons on the same date last year. The European Union, Canada, and Central and South America account for the increase. Sales and shipments should remain brisk as world livestock production expands. The 1998 South American harvest will provide stiff competition for U.S. meal in the last half of the marketing year, if production there increases as projected. For now we are staying with our July projection of 7.5 million tons. That is 400,000 tons above exports for the year just ended and 100,000 tons above the USDA projection. Actual meal exports will be influenced by a number of factors. One that has been in the news lately is the negative impact of the El Nino on the South American anchovy catch. The reduced catch would result in less fish meal available for livestock feed and increase the demand for other protein feeds, particularly soybean meal. This phenomenon helped drive soybean prices to $13 in 1973. Converted to a 44 percent protein meal equivalent, world fishmeal production has ranged from 10.1 to 11.4 million short tons over the past four years, averaging about 7 percent of the world protein meal production. For the current year, the USDA projects world fishmeal production at 10.14 million short tons (44 percent equivalent) or 6.3 percent of world protein meal production. Soybean meal accounts for 66 percent of expected production of all protein meals. If, for example, fishmeal production was reduced by 20 percent, world consumption of other protein meals could increase by 2.03 million tons. If two-thirds of that increase went to soybean meal, consumption would be increased by 1.36 million tons. That represents the meal content of about 57 million bushels of soybeans. The U.S. probably would not capture all of that increase, with a large South American harvest in 1998.

With imports at 125,000 tons, year ending stocks of 250,000 tons, and an average meal yield of 47.5 pound per bushel, use of 35.9 million tons of soybean meal will require a crush of 1.506 billion bushels of soybeans. That is 6 million above our July projection, 11 million above the current USDA projection, and 70 million above last year's crush. Problems with fishmeal production or a smaller than expected South American crop could boost that total.

If 1.506 billion bushels of soybeans are crushed, about 16.8 billion pounds of soybean oil will be produced during the 1997-98 marketing year. Allowing for a 2 percent increase in domestic consumption, to a total of 14.5 billion pounds, and exports equal to USDA's projection of 2.4 billion pounds, would leave year-ending oil stocks at 1.51 billion pounds. That is just slightly below stocks at the beginning of the year and well above the stocks of 1993-94 and 1994-95 that produced high priced oil. A larger crush stimulated by meal demand would add to the total carryover. On the other hand, serious reductions in Asian palm oil production might boost the demand for U.S. soybean oil. Palm and palm kernel oil production account for 25 to 27 percent of world edible vegetable oil–production and about 22 percent of all edible fats and oils. Production of palm and palm kernel oil for 1997-98 is projected at 19.89 million metric tons, up from 19.46 million tons last year. A 10 percent reduction in that crop could increase consumption of other fats and oils by 2 million metric tons or 4.4 billion pounds. If soybean oil got its share of the increase, soybean oil consumption could be 1.1 billion pounds above the projection. That is equivalent to the oil content of about 100 million bushels of soybeans.

As of October 2, 417 million bushels of U.S. soybean exports had been sold for delivery during the 1997-98 marketing year. That is a 63 percent increase from the slow rate of sales a year ago and a record level of sales for this time of year. The largest increase was reported for unknown destinations (probably China). Sales are also larger to the European Union, China, and Brazil. Sales to Japan have started slowly. Export demand for U.S. soybeans is expected to be supported by a general increase in world protein use, a third consecutive small crop in China and the need for Brazilian processors to import U.S. soybeans until the 1998 harvest is available. The Brazilian government has approved imports of nearly 60 million bushels of U.S. soybeans without regards to the inclusion of genetically altered soybeans. That appears to open the door to further imports and the likely production of genetically altered soybeans in South America in the near future.

Prospects for U.S. exports during the last half of the 1997-98 marketing year are not as clear. South America is expected to increase plantings of soybeans in response to the high prices of last spring. In addition, the elimination of the soybean export tax and the further development of transportation facilities improves the economics of soybean production in Brazil. However, El Nino watchers point out that the tendency in El Nino years is far below normal precipitation in northern Brazil and above normal precipitation in northeast Argentina, Paraguay and southern Brazil. Some early indications of that pattern are already emerging. The current El Nino pattern is very strong, but is also producing some unexpected weather events. In its pre-planting estimate, the USDA projects South American production potential at 1.65 billion bushels, 10.6 percent larger than the record crops of 1995 and 1997. Larger soybean crops are also expected in other minor producing regions, including the European union. Production in those areas is projected to increase by 65 million bushels, or 7.3 percent.

If the large soybean crops materialize, world oilseed production in 1997-98 will total 276.4 million tons, 7.5 percent larger than the crop of the previous year. Foreign production is expected to increase by 5.4 percent. On a world basis, soybean production is expected to account for 53.3 percent of total oilseed production. That percentage has not changed significantly, having averaged 50.3 percent in the previous 20 years.

Soybean export inspections started slowly in 1997-98 due to the small carryover of old-crop soybeans and the later than normal harvest of the 1997 crop. By early October, however, weekly inspections were large. Through the first 5.5 weeks of the marketing year, shipments totaled 65 million bushels, up from 57 million at the same time last year. For now, we are projecting exports for the year at a record 975 million bushels. That level may require some shortfall in the South American crop, but appears attainable in the environment of growing world demand.

Based on the projections of use developed above, and allowing for seed, feed, and residual use of 135 million bushels, total soybean use during the 1997-98 marketing year is expected to total 2.616 billion bushels, leaving carryover stocks of 243 million bushels. The record crop is expected to be mostly used up, leaving carryover stocks at a comfortable level. Soybean prices are somewhat perplexing. Supplies appear to be fully adequate to meet consumption levels and to leave some soybeans in the cupboard at the end of the year. Soybean oil prices are expected to rebound from last year's relatively low level as exports increase and stocks continue to tighten. An average of $.24 per pound is being projected here. In contrast, soybean meal prices are expected to remain at more typical levels, following the run-up in prices last year. We are projecting the average at $215 per ton (44 percent protein), which is equivalent to $225 to $227 for 48 percent protein meal. Given an average crush margin, those product prices translate into a season's average price for soybeans of $6.75 per bushel. As this is being written, the market is offering a season's average price just over $7.00 per bushel. The price strength in early October does not appear to be fully justified by current fundamental. The market is obviously building in a more optimistic supply and demand balance. Optimistic export projections and concerns about the impact of the El Nino abound. If world demand continues to grow, large crops will be needed in 1998. Continued large production is not guaranteed, even without El Nino. Some of this uncertainty is being reflected in the price structure very early this year. Prices could remain quite volatile, trading to lower and/or higher prices than envisioned at this time. Pricing decisions are clearly difficult. Right now there is evidence that end users are not well covered and that speculators have a bullish attitude. This suggests that there will be willingness to buy soybeans at lower price levels.

The spot cash price of soybeans in central Illinois (as reported in the Wall Street Journal) traded to a low of $6.09 on October 1 and rebounded to $7.04 on October 13. It is common for this cash price series to have a low in September, October, or November (9 times in the previous 15 years). Fall lows are typically followed by spring/summer highs. On average the high has been $2.30 above the low. The range, however, has varied from $.91 (1991-92) to $5.03 (1987-88). The “typical” range is about $1.75.

The October rally offers an excellent opportunity for producers to “catch up” on sales. However, additional pricing opportunities are expected as the marketing year progresses.

October 1997Darrel Good, Extension Economist

Cooperative Extension Service, USDA

University of Illinois, Urbana, Illinois

Consensus National Futures and Financial On Line Index

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