Soybean Perspective – January 2008

This past Friday's Winter Wheat and Rye Seedings report from the U.S. Department of Agriculture, provided the first preliminary estimates in the 2008 acreage outlook. Surprisingly, winter wheat acreage was up only 4%, given high current wheat prices. Of course a more detailed analysis revealed that soft red winter wheat was up 21% (1.8 million acres), while hard red winter wheat was actually estimated to be down 1% from 2007 plantings. The report's biggest implication for soybeans is the likely increase in 2008 double-crop soybeans (following wheat), particularly in the soft red winter wheat areas. Our analysis indicates that double crop soybean acreage could expand by 1.0–2.5 million acres from the 2007 level of 4.96 million acres. This range will largely depend on planting conditions, continued strong prices, and the availability of short-maturity seed for soybeans. If seed becomes a limiting factor for soybeans, other crops such as sorghum and corn might be considered by some farmers in the southern U.S. states.

What Is the Status of the South American Soybean Crop?

In January, there is still considerable speculation about the size of the South American soybean crop, and often the estimates do not become very accurate until April or May. Sometimes, it is useful to compare estimates from several different sources. In the USDA's World Agricultural Supply and Demand Estimates report for January, the Brazilian crop size was reduced by 1.5 million metric tons, to 60.5 million metric tons, while Argentina's crop-size estimate remained the same. Despite this revision in Brazilian crop size, the USDA still looks for a 2.5% increase in production over 2007 levels. Partially offsetting the loss in Brazil, the USDA increased Paraguay's crop size by 0.5 million metric tons, to a record 7 million metric tons.

Brazil's National Company of Food Supply (CONAB) noted in its December 2007 and January 2008 reports that dry conditions at planting time and a shift in soybean planted acres in southern Brazil is expected to result in a 0.4% decline in production. The primary difference between the CONAB and USDA estimates is the number of acres planted to soybeans. The USDA expects a 3.9% increase in area, while CONAB is projecting only a 1.2% increase. While there are some slight differences in yield estimates between CONBA and USDA, the shift in soybean area from southern Brazil is expected to result in a decline in yields. Brazil's Association of Vegetable Oil Crushers (ABIOVE) also expects a 2008 crop of 60.5 million metric tons.

So Far, So Good for Soybean Demand

The danger of high prices is the eventual decline in demand. At least for the moment, though, demand appears to be hanging in there. Crush estimates through November 2007 continue at record levels for the season, and gross crushing margins appear to be quite strong, with January margins approaching $1.26 per bushel. Note that these are just gross crushing margins, reflecting the difference between the value of soybean meal and soybean oil and the price of soybeans. Higher energy costs are not included in this margin. Even so, there appears to be nothing signaling a slowdown in crushing demand.

Exports also remain quite strong, considering the high soybean prices. The weak value of the U.S. dollar has helped offset some of the increase in prices, but concerns over the possible lack of growth in the South American crop size also appear to be fueling sales.

Is There Any Downside Risk for Soybean Prices?

Yes, there is downside risk for soybean prices, and it emerges from several areas. It is always possible that the South American crops size could be understated, but perhaps more compelling is the upside potential for U.S. soybean acreage. It is clear that fertilizer prices are extremely high and nitrogen availability may be an issue in some areas. Combined with a high soybean-to-corn price ratio, this may push more acres into soybeans than expected.

On the biofuels side, soybean oil prices are now so high that some U.S. biodiesel plants have transitioned into an unprofitable situation, with some plants now struggling to even cover variable costs. While the mandate from the December 2007 energy bill will help, it is unlikely to keep all plants in business. In addition, the European Union is looking for ways to close the "splash and dash" campaign, and in doing so there is the chance it could have an impact on U.S. biodiesel exports to the EU. There is also a likely slowdown in the pork and poultry sectors, in response to high feed costs reducing the demand for soybean meal. Finally, there is some risk of softening in Chinese soybean imports, with the possibility of a slowdown in China's economic growth.