August drought | Market analyst predicts that soybean prices will rise, but not to 2012 levels
The fundamentals are in place for soybean prices similar to 2012-13 but that’s not likely to happen, says a grain industry analyst.
“I see very similar supply and demand, both (in the U.S.) and globally, as where we were at 12 months ago but with different dynamics driving price,” said Arlan Suderman, senior market analyst with Water Street Advisory.
Strong soybean prices support Canadian canola prices, which otherwise are weighed down by expectations of a large prairie harvest.
A year ago, soybean prices began to soar in July and August when it became apparent that the U.S. was experiencing the worst drought in 50 years. That attracted the attention of Wall Street investors who poured money into crop futures, helping to drive them higher.
Suderman said this year’s drought concerns didn’t materialize until the last week of August, which makes it harder to build momentum, especially combined with the possibility of a U.S. military strike on Syria.
“Fund managers are afraid to chase market uncertainty,” he said.
That’s why, despite bullish market fundamentals, Suderman isn’t forecasting a repeat of 2012 high prices.
The only thing that would provoke a similar market response would be the development of a moderate La Nina weather cycle in December/January, which could cause a drought in Argentina and Brazil during their growing season.
“If that happens on top of the short U.S. crop, all of the sudden we could have explosive soybean markets and possibly go to new record highs,” said Suderman.
He has analyzed weather data that shows a La Nina event has emerged, much to the surprise of weather forecasters.
Drew Lerner, president of World Weather Inc., has heard similar assertions from other people recently. He has no idea where they are getting their information from because it is wrong.
“There is no La Nina underway. There is no advertisement for a La Nina to occur. So I don’t know where (Suderman) is coming from,” he said.
The 30-day average Southern Oscillation index is absolutely neutral.
Sea surface temperatures in the Eastern Pacific Ocean have a slightly cooler bias but well off the La Nina threshold. Sub-surface ocean temperatures, which have a strong influence on surface temperatures, are actually warming.
“Everything that I’m looking at says that we are not in a La Nina and we are not going into a La Nina,” said Lerner.
Suderman expects a rise in soybean prices regardless of the La Nina situation due to the deteriorating condition of the U.S. crop.
His ending stocks number heading into the U.S. Department of Agriculture’s August supply and demand report was 131 million bushels.
The USDA would have had the same ending stocks number had it not decreased total use by 88 million bu. in conjunction with a 165 million bu. reduction in production.
“I just can’t find any justification in their numbers for cutting the demand,” said Suderman.
As a result, the USDA has an ending stocks number of 220 bu., which Suderman thinks is artificially inflated.
He believes there will be a bump in prices if average yield comes in lower than the USDA’s 42.6 bu. per acre estimate.
There is a strong likelihood that will happen because the USDA August report was created before the extent of the drought was known.
Suderman’s average yield estimate is 41.5 bu. and that number is dropping daily as the drought persists. His worst case scenario is 39.6 bu. per acre.
The weather pattern is similar to 2003, which also had a hot and dry August.
That year the USDA dropped its soybean yield estimate by six bu. per acre between August and the final estimate in January.
Suderman doesn’t think the decline will be that dramatic because there was considerable damage caused by aphids that year and growers are better equipped to control that pest in 2013.
But yields continue to erode and that means better prices for the entire oilseed sector, including canola.
Suderman believes there will be all the U.S. soybeans that China can take but in the second half of the marketing year demand will have to be rationed to the U.S. livestock sector and prices will rise to encourage imports from Canada and South America.
“I still think we have higher prices to go. I just don’t think we’ll match last year’s highs until or unless we see that drought start to develop in South America,” he said.