Since early August we have seen domestic soybean futures rocket from roughly $8.50 a bushel to an eye popping $14.60 a bushel. Prices have since become range bound in the $14.50 to $13.50 a bushel level, leaving much of the market wondering what’s coming next.
Reasons for Rallying Initially
The primary reason for the recent rally in soybeans is twofold. The first reason being an overestimation of supplies by the USDA. Since the August WASDE report, the USDA decreased the 2020/21 total supply by 360 million bushels, or roughly 7%. This overestimation was not just old crop supplies or new crop production, it was both. From August to October the USDA decreased the expected beginning stocks by 90 million bushels, the new crop production by 290 million bushels, and slightly increased imports to offset. Due to these changes, the market went from anticipating a 13% increase in total supply year over year, to realizing a 4% increase year over year. While it is not uncommon for the USDA to adjust new and old crop supplies slightly, a 7% decline is a rather large one, and would typically result in a demand offset elsewhere in the balance sheet.
The demand offset is exactly what didn’t happen though. The second reason for the recent rally was that while supply was reduced, the demand continued to climb. From the August to the March WASDE, the USDA increased the total demand for soybeans by 130 million bushels, or roughly 2%. A 2% increase in net demand may not seem like much until you take into consideration that the USDA had already increased demand year-over-year by 15%, bringing the total increase to roughly 17% year over year.
As the price chart above shows, the result of both the supply and demand changes were not anticipated by the market and sent prices higher. At the end of the 2020/21 marketing year, the US is now forecasted to have a 120 million bushel carryout, or a 2.6% stocks to use ratio.
120 Million Bushel Carryout
At a 2.6% stocks to use, the 2020/21 marketing year is forecasted to be at levels that we have only ever seen one other time in history, the 2013/14 marketing year when we were recovering from the 2012/13 drought.
Ending stocks at these levels are effectively nothing more than paper supplies. Sure, there may be 120 million bushels of beans throughout the US, but those beans are inaccessible to the market. They are beans that are of poor quality, sitting in the bottom of a bin somewhere, caught up in bankruptcy, or some other area or event that makes them impossible for the market to access.
Even if you assume that the market was able to access some of the beans, the final 120 million bushels would be so geographically diverse that the processors would have no use for them. To put this into perspective, roughly 90% of the soybeans in the US are grown in 743 different counties. If we assume an even distribution of supply for the 120 million bushels in ending stocks, then each county in the US will have roughly 161,000 bushels at the end of the marketing year, or roughly 1.2% of one days use of soybeans.
Summer Growing Season
The fact that the US is running on effectively zero beans sets us up for an interesting summer growing season. Almost every summer we have a period of hot, dry, weather that causes prices to run up as the market grapples with what may be a reduction in supply. This summer, however, is even more critical due to the overall lack of current supplies. Additionally, with parts of both the Eastern and the Western Corn Belts already showing signs of drought in the USDA Drought Monitor, a move to $16 a bushel or higher soybeans may be inevitable.