Crop analysts say a showdown in oilseed markets is beginning to unfold and growers will likely be taking the bullet.
The U.S. Department of Agriculture recently issued a soybean price forecast clearly at odds with the futures markets.
In its world agricultural supply and demand estimates report, the USDA projected a 2004-05 soybean price in the range of $5.85-$6.85 US per bushel.
On May 17, the November futures contract closed at $7.07 per bu., a dichotomy University of Illinois agricultural economist Darrel Good found bemusing.
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“It’s really quite striking that the USDA balance sheet and their projected price of soybeans is considerably below what the futures market thinks soybeans are worth next year. So there is a reckoning to take place here at some point.”
The November contract fell 45 cents between May 11, the day before the report was issued, and May 17. If the U.S. crop comes in as big as analysts anticipate and the next South American crop rebounds, futures prices will continue to drop.
USDA’s soybean forecast shows 2004-05 prices down 17 percent from this year’s average. The reason is its forecast of a record global oilseed production of 378 million tonnes, up 13 percent from the 2003-04 crop year.
The U.S. soybean crop is expected to make the biggest recovery, rising 23 percent to a record 80.7 million tonnes.
“The big unanswered question of course is, will South America be able to rebound from this year’s relatively low output?” said Good.
Fred Oleson, chief of Agriculture Canada’s market analysis division, said the expectation is that production in South America will return to normal after a year of poor yields and disease pressure.
Brazil was expected to produce more than 60 million tonnes this year, but the USDA has scaled its projection back to 53.5 million tonnes.
Reports out of Brazil are more conservative, calling for a crop as low as 49 million tonnes. Estimates for the 2004-05 Brazilian crop are back above the 60 million tonne mark.
Oleson said the market hasn’t fully reacted to the USDA report and the South American crop projections because it tends to rely on current conditions rather than forecast production.
“As the crop year progresses and the USDA looks like it’s going to be right, then the markets will gradually incorporate more and more of that information.”
There already has been a market adjustment. The July futures contract, reflecting the old crop, was priced at $9.06 per bu. May17, down $1.16 from May 11.
But old crop prices were still higher than the new crop November price of $7.07.
“I guess (futures prices) could lose another dollar if the USDA production estimate turns out to be correct,” said Oleson.
Canola growers can expect a similar fate as their soybean counterparts, said Canola Council of Canada president Barb Isman.
“We are most likely going to experience reduction in prices ourselves.”
She encouraged growers to investigate some of the pricing tools available to them.
For its part, the council will attempt to stimulate canola consumption through its U.S. promotional blitz.
One encouraging sign is that China has already booked cargo for the new crop year.
It tends to be an all-or-nothing buyer of canola. When the Chinese are in the market they are a top-three export destination for seed and oil, but there are years when it buys nothing.
“We know it won’t be a no-canola-export year to China. We know that,” said Isman.
