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Has the tide turned against the bull market in soybeans? The long term answer may be yes, and the reasons are weather and the economy. Just like last year, a wet and cool planting season got the soybean and corn crops off to a slow but well-watered start.
Last year, this was followed by regular forecasts of a hot, dry spell that were expected to damage the developing crop. But these forecasts never quite materialized, and the same thing has happened this year. In fact, the extra warmth that did occur in recent weeks this year has been quite beneficial to both corn and soybeans. Corn needed heat to add Growing Degree Days which are needed to produce an optimal yield, and soybeans also needed some extra heat simply to speed up plant (and pod) development in order to diminish the substantial risk posed by an early frost.
In addition, timely rains have fallen on much of the soybean crop this year just when it was most needed: during podsetting and pod filling stages. Corn also saw favorable rain and temperature conditions during its critical pollination period in late July and early August, and the USDA responded on the August crop report with a big 6.1 bushel per acre (4%) jump in the projected corn yield versus their July projection. Since soybeans develop later than corn, the August report did not reflect the improved condition of the soybean crop. That is likely to happen in September.
If the soybean yield is increased by 4% in September (from 41.7 bushels per acre in August), it would result in a new record high yield of 43.36 bushels per acre. The USDA already called for a record US soybean crop of 3.199 billion on the August report due to higher acreage, and a 4% yield increase in September would take the 2009/10 crop to a whopping new all-time high of 3.33 billion bushels.
If we keep total soybean usage at the current projection, this would raise the 2009/10 ending soybean stocks to a burdensome 341 million bushels in 2009/10 versus the 110 million forecast for the soon-to-expire 2008/09 crop year. Actually, the USDA lowered crush and exports by 10 million bushels each on the August report. Many traders were skeptical about the reduction when the report was released, but a couple of weeks later this reduction makes a good deal more sense. One of the main indicators of softening demand was the July crush usage report issued by the National Oilseed Processors Association. NOPA issues monthly crush estimates that are released in advance of the larger and more official Census Bureau report. They estimated that the July crush was down sharply to just 120.9 million bushels, which was well below the lowest pre-report estimate. This projects to just 126.6 million bushels for the larger Census Bureau number, and that is a big red flag on demand. (See chart.)
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