Market Matters Blog

We're entering a critical time period for the soybean market: January's report is right around the corner, South America's crop is up and growing on record acreage and demand from China appears strong. Amid all of this, U.S. farmers are making their decisions on what to plant next year. This choice, many farmers have told me, is agronomic. They like to stick to their rotations. Yet the economics are hard to ignore and surely factor into some farmers' planting decisions.

"The market is telling us to plant soybeans," Corning, Iowa farmer Ray Gaesser said last week. The corn to soybean price relationship, often expressed as a ratio, is at 2.56 (soybean prices are 2.56 times the corn price) using new crop contracts. "The market's saying we will realize a better return on soybeans in 2014."

Rabobank's 2014 ag market outlook added a nice point to this price relationship: "Even though the new crop ratios are weaker than nearby ratios at just over 2.5 for soybeans-to-corn and near 1.5 for wheat-to-corn, the price gap still favors alternative crops to corn."

Farmers are also comparing the cost of production for various crops. USDA's latest forecasts indicate the average cost per acre of corn is $655.76, or roughly $4.10 per bushel (using a 160 bpa average). On soybeans, USDA expects it will cost $430.28 per planted acre, or roughly $10 per bushel (using at 43 bpa average). Compare that to current new crop futures prices of about $4.50 for corn and $11.63 for soybeans.

"When you look at prices and factor in the lower cost to produce soybeans, it makes them more attractive," Gaesser said.

USDA's latest estimates peg 2013-14 ending stocks at 150 mb with a stocks-to-use ratio of 4.6%.

"The domestic market really needs soybeans," Gaesser said, explaining that the domestic market is going to need soybeans whether or not Brazil and Argentina produce record crops. About 55% of the U.S. crop is sold overseas, he said, and the remainder is fed to pigs and chickens. Lower corn prices have triggered some expansion in those sectors, and since soybean meal is a part of their rations, "that creates some internal demand for soybeans, too."

But is that internal demand enough to keep prices at a decent level? Rabobank doesn't think so, and some economists I've spoken with are pretty skeptical too. The U.S. rebuilt corn stocks last year and look what happened to prices. Soybeans could be poised to do the same thing in 2014-15.

"Our production base has been a little bit misallocated, and that is too much corn and not enough soybeans" over the past few growing seasons, Purdue ag economist Chris Hurt said in mid-November. Acreage is likely to shift to soybeans next year, possibly to the tune of 3 to 4 million acres, Hurt said.

Private analytical firm Informa Economics sees soybean acreage in the U.S. swelling to 83.8 million acres in 2014, up more than 7 million acres from 2013. Informa will release updated acreage estimates on Wednesday, Dec. 18.

"We're going to have to shift over to beans for next year," Hurt said. "So you start running those numbers, now oh my gosh, we're going to have too many beans next year, and we're still going to have the carryovers corn. That says we've got to build usage base."

While domestic livestock industries recover from years of high prices and drought, the real demand focus for U.S. soybeans will be demand from China. Will they buy more beans this year, or less? Rabobank sees China buying 16% more soybeans this year since the country's stocks are running low. Rabobanks's 69.5 million metric ton demand estimate (2.55 billion bushels) is slightly higher than USDA's current estimate.

If China's demand stays on that path and Brazil, Argentina and Paraguay produce 149 mmt (5.5 billion bushels) of soybeans, Rabobank sees soybean prices falling to $10.70 by the fourth quarter of 2014, around the time of U.S. harvest.

Lots can happen between now and then, but the key things to watch for are a weather scare with the South American crop and Chinese demand.

(CZ/BAS)