grain analyst - 2014 soybean outlook - december 2013

2014 soybean Outlook

1


2

INTRO As the calendar turns from 2013 to 2014, the soybean

market set-up is very similar to where it was last year at this

time, but our forward outlook is different. This report is de-

signed to bring you - producer, processor, trader or market

observer - up to speed on the fundamental factors affecting

the soybean market in 2014 and how we at Grain Analyst

would approach them.

Just like Adam Smith’s invisible hand helped corral the corn

bull market of recent memory, we look for similar action to

occur in soybeans over the 2014 growing season and 2015

marketing year. High prices during the United States’ (U.S.)

pre-season planning will dictate that marginal producers,

who have the ability to plant soybeans, do so at the expense

of crops like corn. This will result in soybeans being planted

at a record pace in both the U.S. and South America, bringing

prices down from the historically high levels we have seen

in recent years. Price action resulting from this should bring

relative price value relationships between crops back in line

with historical averages, after extended periods of being

away from average levels. We hope this report will set the

table for the story that will be the 2014 soybean crop year.

DEMANDWhen analyzing demand for soybeans, we only need to look

in one place - China. Chinese domestic demand grew almost

5% between this year and last year. In the last decade,

Chinese domestic soybean use has grown by over 100%.

We expect demand to remain robust for years to come, as

more Chinese citizens change their diet to a higher protein

base. China increased their projected import demand for the

2014 year by almost 13% from just fewer than 60 MMT (2.2

billion bu) to above 69 MMT (2.5 billion bu). They are looking

to replenish the reserves they used in 2012-2013 and meet

consumption growth.

Continued export demand out of China will be needed for

soybean prices to maintain their current stature in the grain

and oilseed hierarchy, because U.S. demand is static and will

remain static due to an aging U.S. population and changes

in diet (less animal protein intake). While China is raising

domestic use, American use has come down since 2009 and

has been essentially flat over the last decade. Unlike corn,

where new domestic uses have been discovered and pushed

into the mainstream, U.S. soybean markets have been driven


3

mainly by crush demand and exports since 1999. Growth in

the soybean business can be directly attributed to export

growth in China. At the turn of the 21st century, almost 60%

of all soybeans produced in the U.S. were used domestically.

By 2009, that number had fallen to just above 50%.

Prices have traded between $8-18 since 2009 and U.S.

domestic use has not changed year over year. This points to

the inelasticity of soybean demand right now in America, and

we do not see it changing this year. Based on the belief that

China will keep exports near current levels, we do not believe

we will see a demand-side driven rally in 2014.

PLANTED ACRESWhile 2013 saw U.S. farmers plant just below a record

amount of soybean acres, soybean prices have still signaled a

need for more. The corn and bean shortage that came about

from a stretch of sub-par growing seasons between 2010

and 2012, resulted in record high prices in each market.

Both markets were screaming for more production. Corn

won out in 2013 and planted a record crop. Our experience

indicates that corn farming is preferred by producers who

can grow both. Even as bean prices were demanding more

supply, planted acres were lower than needed because corn

prices were high, and more farmers chose to chase high

prices in corn than beans. This will not be the case in 2014,

as projected soybean plantings are expected to break an all-

time record by as much as 7 million acres. The last record for

planted soybean acres came in 2009, at just above 77 million

acres. In 2014, because of low corn prices, we expect 82

million acres to be planted in 2014, an increase of 7%.

The U.S. marketplace is not alone in its efforts to replenish

supply. America has a new partner/competitor in both Brazil

and Argentina, who have joined domestic efforts to feed the

world with soy protein in recent years. Farmers in Brazil

have been expanding soybean acreage for decades. In 1995-


4

96 Brazil harvested nearly 11 million hectares of soybeans

(27 million acres). This year, total Brazilian plantings are

projected at 71+ million acres. Argentina will plant almost 50

million acres themselves. Between Brazil and the U.S., soy-

bean acreage is expected to be in the mid-100 million acre

range, up over 50% in the last 20 years. Throw in Argentina’s

50 million acres and we estimate total planted acres across

the three soybean superpowers near 210 million.

SUPPLYThe starting point for the year (called the carry-in) sits at 160

million bushels, with a usage rate of just over 5%. This means

that the supply left over after everyone bought this year, is 5%

of what we need to meet to match next year’s demand. Think

of it as leftovers we will use toward next year. The U.S. needs

to produce 95% of the soybeans they plan to sell in the 2015

marketing year over the next growing season. In Lehman’s

terms, the bean market has been living paycheck to paycheck.

This will put a lot of pressure on price as any future supply

disruptions occur, which will make beans a very fast market.

Supplies will remain tight until one of two things happen:

1. Export demand falls – U.S. domestic demand has been

very inelastic since 2009. To expect a change in U.S.

use, either up or down, would be misguided. So too

would an expectation of increased interior demand

from South American countries. Brazil and Argentina

are fantastic at growing soybeans, but they do not

have the ability, or infrastructure, to do much with

them “in country”, yet. Any fall in export demand will

really hurt South American markets for this reason.

2. Supplies Increase – The supply side is more flexible in

the short term, especially now that the corn crunch

appears to be in the rear view mirror as more acres go

to beans. As corn prices have come down, corn pro-

duction margins have come down as well. This factor

increases farmers’ desire to plant beans, if possible.

Producers should chase higher margins and increase

bean acres, which will increase overall production,

eventually leading to more U.S. supplies.

We think it is pretty clear; number two is the more probable

scenario this season. Both could happen, but we doubt it.

Chinese macro-problems are worth watching, but at this

point things appear to be stable. Without a crash there or in

other major macro markets, do not expect to see number one

anytime soon.

The result of the second scenario will have a negative effect

on soybean prices; the odds of this go up drastically if the U.S.

soybean acreage picture crystallizes like we believe it will.

Below is the supply/demand chart for U.S. soybeans in 2014.

Our focus should immediately go to the stocks-to-use line

for the end of the 2014 growing season. If 82 million acres

go into the ground, and producers yield like they did this year

(43 bpa), the total production for the U.S jumps +300 million

bushels from +3.2 billion bushels to +3.5 billion bushels. If

demand remains constant, the carry-in for next year will go


5

from 160 million where it is now with 5.5% stocks/use, to

north of 450 million. The result will have the U.S. bringing

the third largest supply relative to demand since 1987, only

trailing 2005 and 2006.

On a relative level, we think this would bring U.S. soybean

prices back into line or even below the 2.2 ratio it has had

with corn over time. With U.S. corn, average price projec-

tions for 2014 are coming in near $4.25. The average corn/

bean ratio would put bean prices below $10.00.

The takeaway we want all readers of this soybean report to

have is that the results of high prices and high profit margins

are eventually, higher supplies. Soybean producers would

be wise to look at what was successful in 2013 corn market-

ing. The tight carryout currently on hand should keep the

soybean market inverted for much of the Q-1 2014 (cash

prices higher than deferred futures) while we wait for new

product from south of the Equator. The price action during

the second part of the year going into 2014 U.S. harvest, will

depend on whether or not South America had a successful

soybean harvest and ultimately what the domestic crop is

projected to look like.


6

If one of the two variables from the supply section would

occur, we project U.S. CASH soybean prices to trade be-

tween $10.50-13.50 per bushel during the 2014 marketing

season. We expect to see prices trade at the high end of

that range early in 2014 and getting cheaper as time goes

on. As harvest takes shape in the late summer, we project

price to fall into the low end of that range as a successful

harvest approaches.

We expect November new crop futures to trade between

$9.00-12.00 per bushel throughout 2014. Much like cash

soybeans, we expect a slide in price after South American

harvest and U.S pod setting, if successful. Using 2013 yields

and an 82 million acre soybean planting number, we expect

prices to be near the bottom of that range at harvest.

YOUR ACTIONBased off this analysis, we recommend that an early market-

ing approach is considered for producers. Traders should

expect negative price action to dominate, as one of those

scenarios would become probable. The past 5 years, soy-

bean producers and planning boards across both continents

have done a good job of increasing acreage when needed.

We feel the acreage increase part of the cycle will come to

an end over the next growing year. Between the U.S. and

Brazil/Argentina, the supply side of the equation will grow

faster than ever before with a decent crop, while the demand

side will be slower to adjust upward. When this occurs, it is

“price” that cuts production, which we feel will be needed in

2015. The only way that is done is by reducing price below

variable cost to dis-incentivize planting. One can witness

this right now in the corn markets. Corn now finds its shoe

on the other foot, looking to cut production from its histori-

cally high plating levels of the past two seasons.

We want all readers to understand, all analysis is based off

a normal growing year assuming yields come in near trend

expectations. We follow these markets every day and expect

the soybean story will come with plenty of rumor and innu-

endo on both the supply and demand sides, factors which

conspire to keep volatility at the high levels we have seen in

recent years. Supply worries can turn into $1.00 or $2.00

rallies. That said, over recent years, U.S. producers have

proven their ability to raise a crop under very poor circum-

stances. One should approach any year with the assumption

the market will see close to a trend yield, not plan for crop

failure. With that in mind, rallies need to be used as selling

opportunities, not times to lift hedges. To maintain a suc-

cessful risk management program in a market like soybeans,

one needs patience and proper risk management. This can be

achieved through personal experience or teaming up with an

experienced advisor who can get you to understand what to

expect from managing risk or trading in these markets.

The best cure for high prices is high prices. Like every other

situation in life where free market factors are at play, we ex-

pect to see the result of high prices to be higher production, as

producers chase dollar signs. The real question now gets put

to you the producer/soybean trader, what do you do about it?

Subscribing to Grain Analyst would be a good place to start.


7

DISCLAIMERTHIS MATERIAL IS CONVEYED AS A SOLICITATION FOR

ENTERING INTO A DERIVATIVES TRANSACTION.

THIS MATERIAL HAS BEEN PREPARED BY A GRAIN ANA-

LYST BROKER WHO PROVIDES RESEARCH MARKET COM-

MENTARY AND TRADE RECOMMENDATIONS AS PART OF

HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICI-

TATION FOR TRADES. GRAIN ANALYST, ITS PRINCIPALS,

BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES

FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS

OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK

TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJEC-

TIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNI-

CAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER

FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION

OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT

FROM OR CONTRARY TO THE OPINIONS AND RECOM-

MENDATIONS CONTAINED THEREIN.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE

OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRAD-

ING FUTURES CONTRACTS OR COMMODITY OPTIONS

CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS

SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING

LEVERAGED POSITIONS AND MUST ASSUME RESPONSI-

BILITY FOR THE RISKS ASSOCIATED WITH SUCH INVEST-

MENTS AND FOR THEIR RESULTS.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH

TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR

CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU

SHOULD READ THE “RISK DISCLOSURE” WEBPAGE AC-

CESSED AT WWW.GRAINANALYST.COM AT THE BOTTOM

OF THE HOMEPAGE. GRAIN ANALYST IS NOT AFFILIATED

WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM,

NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS

TRADING DOES NOT GUARANTEE OR VERIFY ANY PER-

FORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SER-

VICES.

THE RISK OF LOSS IN TRADING COMMODITY FUTURES

AND OPTIONS CONTRACTS CAN BE SUBSTANTIAL.

THERE IS A HIGH DEGREE OF LEVERAGE IN FUTURES

TRADING BECAUSE OF SMALL MARGIN REQUIREMENTS.

THIS LEVERAGE CAN WORK AGAINST YOU AS WELL AS

FOR YOU AND CAN LEAD TO LARGE LOSSES AS WELL AS

LARGE GAINS.

grain analyst - 2014 soybean outlook - december 2013

Business