Stronger prices may be coming for soybeans

One need only look at the current U.S. soybean supply and demand balance sheet to see that the 1996 Freedom to Farm legislation isn't working as intended, says Gerald A Bange, chairman of the USDA World Agricultural Outlook Board.

“Soybean production for 2001-02 is forecast at 2.834 million bushels, and this is coming off a year when the average market price was $4.55 per bushel,” says Bange. “Freedom to Farm isn't working because farmers apparently are not responding to market signals. And these market signals are being buffered somewhat by government programs.”

Export situation

Turning to soybean exports, Bange says U.S. farmers should be able to hold steady at one million bushels. “For some years now we've been estimating soybean exports at one billion bushels. We finally reached that number in 2000-2001, and we're expecting to hold exports at essentially the same number for 2001-2002.”

Ending stocks for U.S. soybeans are expected to increase from 240 million bushels to about 255 million bushels, he says, but a stronger market price still is expected for U.S. producers in 2001-02.

“The range for the average market price is $4.40 to $5.40 per bushel, so we should see a price of about $4.90 per bushel. Even with our ending stocks actually increasing, we still should see a stronger price. And much of this is due to the current demand for soybeans coming out of China,” says the economist.

The current downward pressure being seen in the soybean market can be attributed to several factors, says Bange. “The Brazilians are talking about a 45 million ton crop. This is the crop that will be harvested after the first of next year. If they don't have weather problems, the Brazilians will have a big crop, and that will have an impact on prices. They've had several years of good weather, and if it happens again, we'll see a lot of competition from Brazil,” he says.

Another factor causing concern in the markets is China's position on GMO's, adds Bange. “Right now, China is making rumblings about GMO's. China is a major soybean importer, and when they say they're thinking about which GMO's to allow into their country, the entire market becomes nervous and prices are affected.”

Since about 1980 or 1981, U.S. soybean stocks have decreased gradually, he says, but U.S. prices have not risen accordingly.

“If we look at the market in 1985-86, very low prices were associated with a very high stock level. Now, we have relatively low stocks, but the price is still low. With ending stocks for 2000-2001 at 240 million bushels, we have an average market price of $4.55 per bushel or an 8.5 percent stocks-to-use ratio.

South America

“But we have to look at the impact of Brazilian and Argentine stocks to get the whole picture. If you count these stocks at about the same time that you're counting U.S. stocks, you'll see that the worldwide stocks level has risen sharply. We can't look only at what is happening in the United States.”

China, says Bange, has become a major importer of soybeans, and this has occurred since the mid-1990s. “In 1993 and 1994, China was importing virtually nothing. Now, they're importing about 14 million metric tons. Given what is occurring in Brazil, and what has happened with U.S. production, this market really would be in the pits were it not for China's imports. It's bad enough as it is, but it would be much worse if China wasn't taking these 14 million tons off the market.

“This 14 million tons isn't coming from the United States alone. About half of it comes from the United States and the other half comes from elsewhere in the world. For awhile, China was importing oil. Now, they provide their own labor and press the beans themselves.”

Two primary reasons

There are two primary reasons China is importing so many soybeans, says Bange. One is for feed consumption — as their incomes have risen, the Chinese have put more soybeans into animal feeds.

“The Chinese have built a lot of processing plants along the coastal areas, and they're importing a lot of beans for those plants. They also have a nutrition program where they're feeding soymilk in the schools. They've expanded their processing capacity, so we think they'll be in the soybean business for some time. If, for whatever reason, they cut off this 14 million tons of imports, it would have a devastating impact on U.S. and world markets.”

Brazil's soybean production is worrisome for the U.S. market, says Bange. Brazil is anticipating a production of 40 million tons for 2001-02. This is up from about 15 million tons in 1985-86.

“Brazil is moving its production — they're trading off their more valuable land for cheaper, more productive land. And Brazilians aren't happy with U.S. farm programs. A formal complaint to WTO already is in progress. Brazil has almost doubled its soybean production in the past 10 years.

“The collapse of the real — Brazil's form of currency — also has had an effect on the soybean markets. Since July of 2000, the real has fallen 49 percent against the U.S. dollar. A weak real means that their ability to compete with the United States is greater. The Brazilian price is improving because of this weak currency, and that gives them a competitive advantage. They can undercut us.

Argentina, says Bange, also is producing more soybeans. “When we look at the combined increase of Brazil and Argentina versus the United States, it's been phenomenal.”

Farmland values, he says, are beginning to hamper U.S. producers' ability to compete in a world market. “USDA has done a fair amount of research to help determine who can produce the cheapest soybeans. In terms of variable costs of production, U.S. producers can beat competitors ‘hands down.’ Our problem is that land values are being capitalized into the cost equation.

“Overall, our competitors can produce more cheaply because we're factoring in high land values. Land values have been rising, so this is causing some difficulty for U.S. producers. As the cost of land rises, it goes back into the cost of production. And though we can beat our competitors on variable costs, we can't beat them on total costs.”

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