Todd's Take
Soybeans Off to Bearish Start
Similar to how we looked at corn last week, soybean prices also have a historical tendency to trade in a range related to their production costs as estimated by USDA*. For soybeans, the January futures contract tends to trend within a 20% premium and an 80% premium to cost in years that lacked unusual events like drought.
When I wrote about this a year ago, the expected range for soybeans was $8 to $12. Because USDA estimated 2014-15 U.S. ending soybean stocks at 410 million bushels, Brazil was expecting another record crop, and the U.S. was expected to plant more soybean acres in the spring, I said that a range of $7 to $11 a bushel was a more realistic starting point for 2015.
By the end of 2015, U.S. ending soybean stocks had dropped to 191 million bushels for 2014-15, Brazil produced a record crop of 3.53 billion bushels, and the U.S. harvested its own record crop of 3.93 billion bushels, which came from record plantings of 83.3 million acres. Soybean demand did perform better than expected, but prices were swamped by a flood of new supplies.
The official range of January 2016 soybeans in calendar year 2015 stretched from a high of $10.50 1/4 to a low of $8.44 1/4. The high fell short of the model's expected price of $12 and my expected price of $11, mainly because the only threat to crops in 2015 was a brief concern about too much rain in late-June and early-July. For a second consecutive growing season, summer heat was not a factor.
Fortunately for producers, January soybeans did not reach the early expectation of $7 in 2015 or even the model's expected low of $8. I attribute the bullish support to better-than-expected demand from China, something that I wrote about frequently in 2015, especially after USDA's bullish Mar. 31 Grain Stocks report.
As we look ahead to 2016, USDA's estimated cost of production for soybeans is $6.49 a bushel**, which means that the expected range for Jan. 2017 soybeans is $7.79 to $11.68 or $7.80 to $11.70, if you don't mind the rounding. As of Monday, Jan. 2017 soybeans were sitting at $8.82, well below the model's midpoint of $9.75.
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Similar to a year ago, Brazil is on track for another record harvest and U.S. soybean plantings are expected to show another increase, possibly up to 85 million acres in 2016. China's demand is still active by all measures, but with my suspicion that additional soybeans are finding their way out of Argentina***, $7.80 is not unreasonable this year.
As usual, weather will have the biggest say in where prices trade, and so far, soil moisture levels look adequate throughout the Midwest. DTN Senior Ag Meteorologist Bryce Anderson sees a chance for summer heat returning in 2016 and, for that reason, set his early yield estimate a little below trend, at 45 bushels an acre.****
Needless to say, it is still very early and we have a lot to learn about the year ahead. Given the overwhelming bearish start that we are facing this year, using a 60% premium for the upper boundary seems more reasonable, an adjustment that points to $10.38 a bushel. Unless weather provides some bullish surprise, 2016 is setting up to be another tough year for most producers.
* For valuation purposes, the production cost used here ignores land expense. Land expense is an important factor but is set aside because it varies widely for each particular farm.
** USDA's Commodity Costs and Returns found at:
*** See DTN article, "Sometimes It Pays To Ask..." from Jan. 15, 2016 at:
**** "Midsummer Crop Weather Protection" by DTN Ag Meteorologist Bryce Anderson, Jan. 22, 2016 at:
Todd Hultman can be reached at todd.hultman@dtn.com
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