Oil Crops Outlook: Soybean Prices Plunge to 9-Year Low

Using a harvested acreage estimate of 88.9 million acres and a projected 2018/19 yield of 48.5 bushels per acre, USDA edged up its production forecast for U.S. soybeans by 30 million bushels this month to 4.31 billion. When carryover stocks are also included, the U.S. total supply of soybeans for 2018/19 expands to at an all-time high of 4.8 billion bushels.

Following China’s recent implementation of an additional 25-percent ad valorem tariff on U.S. soybeans, USDA lowered its 2018/19 export forecast by 250 million bushels this month to 2.04 billion. Season-ending stocks are forecast up 195 million bushels this month to an all-time high 580 million.

The U.S. season-average farm price in 2018/19 is forecast down to $8.00-$10.50 per bushel from $8.75-$11.25 last month.

Domestic Outlook

High Soybean Stocks, Bright New-Crop Outlook Weigh on Prices

Soybean prices collapsed in June under the combined pressure of favorable U.S. growing conditions, an increase in sown acreage, large old-crop stocks, and China’s tariff hike on imports from the United States. On June 1, cash soybean prices for central Illinois were $9.86 per bushel but by early July had plummeted to just above $8.00.

Not since December 2008 have prices for the crop been that low. Provided the crop develops without major difficulties, post-harvest prices this fall are liable to be even lower.

Overall, soybean crops are in fine shape this summer following a routine spring planting campaign. Throughout the last half of June, rainfall soaked a broad swath of the Midwest growing region.

Most soybean-growing regions have soil moisture that is considered adequate to surplus, although parts of Missouri, Arkansas, Louisiana, and Kansas could still benefit from additional rainfall.

Crop blooming is generally ahead of average. As of July 8, 71 percent of the U.S. crop was rated in good-to-excellent condition. No other year but 1994/95 has had a better crop condition rating at this date.

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USDA’s Acreage report last month indicated that farmers planted 89.6 million acres of soybeans this year. The new sown area estimate is less than 1 percent below last year’s record of 90.1 million acres and is 575,000 acres higher than farmers’ intentions in March. Most of the increase from March planting intentions was in the eastern Corn Belt States of Illinois, Michigan, Indiana, and Ohio.

In contrast, soybean acreage fell short of intentions by 500,000 acres in North Dakota, while Minnesota and Nebraska were each 100,000 acres lower than anticipated.

Based on an increase in the soybean harvested acreage estimate to 88.9 million acres and the same projected 2018/19 yield of 48.5 bushels per acre, USDA edged up its production forecast by 30 million bushels this month to 4.31 billion. Only last year’s record harvest of 4.39 billion bushels would be larger.

USDA’s Grain Stocks report last month indicated that June 1 soybean stocks totaled 1.22 billion bushels. This season’s third-quarter inventory is the largest ever and exceeds the year-ago level by 26 percent. However, for the fourth quarter, the drawdown of old-crop stocks could be accelerated by record high domestic and export demand.

Unusually robust export shipments to markets other than China are anticipated this summer. Reflecting this seasonal strength, USDA is raising its 2017/18 export forecast this month by 20 million bushels to 2.085 billion.

The higher forecasts of 2017/18 soybean demand this month reduce the forecast of season-ending stocks by 40 million bushels to 465 million. When carryover stocks are included, the U.S. total supply of soybeans for 2018/19 expands to at an all-time high of 4.8 billion bushels.

Domestic Soybean Crushing Continues To Surge

Domestic crush margins in 2017/18 are exceptionally strong and will remain so well into 2018/19. Currently leading the charge for domestic processors is a higher demand for soybean products, which elevates the forecast soybean crush for 2017/18 to 2.03 billion bushels—up 15 million from last month. Soybean processing may also grow for 2018/19 to 2.045 billion bushels.

With a decline in Argentine output this year, U.S. soybean meal exports are helping to fill the gap. This month, USDA raised its forecast of 2017/18 soybean meal trade by 400,000 short tons to 13.5 million, topping the previous record of 13.1 million in 2014/15.

For 2018/19, demand for U.S. soybean meal exports is forecast to fall to 13.1 million tons, tempered by next year’s likely recovery in South American production. However, for the first half of 2018/19, U.S. shipments should stay robust.

Moderately lower soybean meal prices in 2018/19, which are forecast averaging $315-$355 per short ton (versus a 2017/18 average of $350 per ton), should sustain the competitive momentum of U.S. exports for some time.

This summer, U.S. soybean oil demand is also getting a boost from competitive prices and supportive policy decisions. Higher required use of biodiesel could strengthen soybean oil consumption. On June 26, the Environmental Protection Agency issued a proposed rule to require renewable fuels blending for the 2019 calendar year at 19.88 billion gallons (up from 19.29 billion in 2018).

Nearly all of next year’s increase would come from higher use of advanced fuels such as biodiesel. This month, USDA raised its 2018/19 forecast of soybean oil use for biodiesel by 500 million pounds to 7.8 billion and for 2017/18 to 6.9 billion.

Thus, total domestic consumption of soybean oil in 2018/19 would be boosted to 21.8 billion pounds from 20.7 billion in 2017/18.

Less costly soybeans and a brisk crush pace will pressure soybean oil prices in 2018/19 to 28-32 cents per pound, not much different than the 2017/18 average of 30.25 cents. Inexpensive soybean oil may encourage more exports in 2018/19 (up 100 million this month to 2.2 billion) and 2017/18 (up 50 million pounds to 2.45 billion).

China Import Tariffs Cloud U.S. Export Outlook

In response to a recent U.S. trade action, China’s Ministry of Commerce reciprocated by implementing an additional 25-percent ad valorem tariff on soybeans and other products—effective July 6. For the time being, China’s processors can now get by without importing any U.S. soybeans as they usually do anyway.

Typically, at this time of year, U.S. sales to China experience a sharp seasonal decline as the country increasingly relies on competing suppliers and the stocks already accumulated. For 2016/17, only 9 percent of U.S. exports to China were shipped in the April-August period.

By the end of summer, though, U.S. export sales to China for 2018/19 may start to lag. Brazilian exporters will primarily shoulder the burden of supplying China with soybeans. This role will last as long as the cost to import from Brazil does not rise substantially above U.S. origins (including the higher tariff).

If the impasse over trade is not resolved, the long-term stakes for the U.S. soybean market are considerable. In 2016/17, China accounted for 61 percent of all U.S. soybean exports, totaling 1.33 billion bushels (36.1 million metric tons) at a value of $14.5 billion.

Despite the historical importance of U.S. soybean trade with China, this top foreign market has never lacked alternative suppliers. In 2016/17, competing exporters accounted for 61 percent of China’s total soybean imports compared to a nearly equal share two decades ago.

For markets other than China, U.S. sales may be enhanced by the widening price discount with South American supplies. Even some sales to Brazil could be realized in the last quarter of 2018. The diversion of more of Brazil’s remaining crop to China could lead to imports of U.S. soybeans, which could help sustain crushing in its domestic market prior to the next harvest.

Despite some offsetting demand increases in other markets, USDA lowered its 2018/19 forecast of U.S. soybean exports by 250 million bushels this month to 2.04 billion. As a consequence, the forecast of season-ending stocks swells 195 million bushels this month to 580 million.

If realized, the 2018/19 final carryout would establish an all-time high. A lower forecast for the U.S. season-average farm price in 2018/19—to $8.00-$10.50 per bushel—reflects this revised supply and demand outlook.

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