By Gavin Maguire
CHICAGO, Jan 9 – The main narrative of the crop arena in 2013 was the steep slump in corn prices over the second half of the year as a large rebound in U.S. corn production helped replenish global stockpiles. In contrast, soybean prices managed to hold relatively firm, and ended the year down less than 10 percent from where they started as stocks remained tight.
But with a record crop emerging across South America and U.S. farmers set to cut corn acres in favor of more soy this spring, the main crop market story of 2014 looks set to be a downward resetting in global soy values.
ONLY JUST BEGUN?
January soybean futures have already lost more than 14 cents a bushel in value since the start of the year, but there are factors undermining the outlook for this market that suggest additional price woes are in store.
Soybean futures throughout the 2014 delivery calendar have come under pressure in recent days, with March prices losing more than 20 cents so far in 2014 and July 2014 prices losing close to 25 cents.
But even larger losses have been recorded in “new crop” contracts, with November futures slipping around 28 cents, or roughly 2.5 percent.
This widening in price losses the farther out you go on the delivery calendar reveals a general souring in sentiment towards soybeans, and hints that additional across-the-board price weakness is likely to unfold over the coming weeks and months.
That said, the outperformance to the downside of deferred prices relative to immediately-available soybeans reveals that any waves of further aggressive selling may still be some way off.
BIG CROP COMING, BUT NOT MADE YET
The chief factor that is both weighing on overall market sentiment and preventing any further slippage in nearby prices is the current South American crop.
At over 157 million metric tons, the 2013/14 South American soybean harvest will be close to twice as large as the United States’ recent impressive haul, and will be the largest from that region in history.
It will also amount to more than 55 percent of total global output for that year. What’s more, that tonnage is capable of fulfilling more than 58 percent of projected total world soybean demand in 2013/14, leaving other producers to fight over the remainder.
This dominance at the production level will endow South American exporters with more price-setting power than seen before, and as a result force all other originators to increasingly become price takers.
In a strong demand environment, that situation is not all bad – or unusual. But given the sheer scale of this year’s crop – which comes hot on the heels of a potentially record-setting U.S. harvest – it is likely that demand will struggle to accommodate all the soybeans expected from South American fields this year.
What’s more, global consumers are fully mindful of the likelihood of U.S. growers dialing up soybean planted area in 2014 from year-ago levels after the recent slide in corn values rendered that crop less economically attractive for the coming season. This should serve to give big soybean buyers and importers the confidence to scale back on soy purchases over the coming months on the expectation that U.S. and South American sellers will have to compete with each other to secure consumer business.
Of course, all this assumes that the South American crop makes it through the remainder of the growing season in decent shape, and that U.S. growers actually follow through on rotation expectations and lift soy area while trimming corn plantings.
So far, crop conditions across the major Brazilian and Argentine growing regions remain broadly crop-friendly, with soil moisture in Brazil’s top soy state of Mato Grosso and on the Argentine Pampas around average levels and trending higher into the crop’s most moisture-dependent growth phase.
But warmer temperatures are also in the forecast for both regions, which if accompanied by a total lack of rainfall could hinder plant development and raise concerns about overall crop potential.
Currently, high temperatures in both regions are not expected to stray beyond the normal band for this time of year, and some rains are projected to fall during the hottest spells. But traders will be closely monitoring the situation across all the region’s main growing areas for any early signs of production problems.
GETTING A RECORD CROP TO MARKET IS NO PICNIC
Should the lion’s share of the South American soybean crop make it through the remainder of the growing season without encountering any stressful weather, it will still be a huge challenge for grain handlers in the region to get it all to market.
Last year’s South American soybean crop was over 10 million metric tons smaller than the one currently being projected, yet it overwhelmed the road and port system throughout Brazil to the extent that actual soybean shipments from the region were delayed by several months in some cases.
This led to extensive frustration among consumers, many of whom were forced to veer vessels to other destinations such as the United States at great expense.
This year some improvements at key port and processing centers are expected to speed up the overall crop flow at those locations. But with this year’s crop expected to be millions of tons larger than a year ago – and a majority of it still needing to navigate narrow dusty highways by truck – some significant logistical jams must still be expected before the crop even makes it to the loading facilities on the coast.
This could ignite another round of mid-year scrambles for fresh supplies by large importers such as China if that country’s own domestic reserves get depleted.
Yet overall the stage seems to be set for a steady and potentially pronounced reduction the price of soybeans over the course of 2014.
Currently, new crop November soybeans are trading at a roughly 15 percent discount to spot January futures in the $11 per bushel region. But with put option open positions recently doubling at the $9 strike price for that delivery slot, there could be significant additional price erosion in the month ahead.