Bloomberg News

Soy Slump Ending as Record Demand Overwhelms Farms: Commodities

October 11, 2011

(For more commodities columns, click CMMKT)

Oct. 11 (Bloomberg) -- The biggest rout in soybean prices in more than two years may be ending as farmers from Iowa to Brazil fail to keep pace with record demand for cooking oil and livestock feed.

The U.S., the world’s largest grower and exporter, will harvest 7.3 percent less this year, leading the first decline in global output since 2009, the U.S. Department of Agriculture estimates. Morgan Stanley expects soybeans to average $14.25 a bushel in the 12 months ending Aug. 31, the most ever and 21 percent more than yesterday’s closing price of $11.775.

The use of soybeans expanded at almost four times the pace of the world population in the past decade, led by China, government data show. While prices began tumbling last month on investors’ mounting concern that slowing growth will weaken demand for raw materials, global consumption of cooking oils hasn’t fallen during a recession in the past three decades, USDA data show.

“People still need food, even if they aren’t buying new cars, refrigerators or other durable goods,” said Steven Nicholson, a commodity procurement specialist for International Food Products Corp., a distributor and adviser on food ingredients in Fenton, Missouri. Prices may jump 19 percent by April because “production is not keeping up with rapidly expanding demand growth from developing nations,” he said.

World Index

Before today, soybeans had plunged 20 percent since reaching a three-year high of $14.65 a bushel on the Chicago Board of Trade on Aug. 31, compared with an 8.9 percent decline in the Standard & Poor’s GSCI Index of 24 commodities. The MSCI All-Country World Index of equities fell 5.6 percent, and a Bank of America Corp. index shows Treasuries returned 1 percent. Today, soybean futures for November delivery surged 4.9 percent to settle at $12.355, the biggest gain in a year.

Grain companies, processors and meat producers are becoming less bearish after cutting bets on lower prices by 62 percent in the past month, Commodity Futures Trading Commission data show. Their net-short position fell to 109,564 futures and options contracts as of Oct. 4. The last time positions were that low was in July 2010, before a rally that drove prices 62 percent higher to a 30-month high of $14.5575 on Feb. 9.

U.S. production may drop 12 percent to a four-year low of 2.944 billion bushels, after dry weather and freezes reduced yields, AgResource Co. said in a report Oct. 7. Inventories at the end of the marketing year will fall 55 percent to 97 million bushels, leaving them at a record-low of 3.1 percent of expected consumption, the Chicago-based research company said. The USDA is scheduled to update its crop forecasts tomorrow.

Major Crisis

“I’m still afraid we’re going to have a major economic crisis,” which will erode demand for food, said Bill Gary, the president of Commodity Information Systems Inc. in Oklahoma City, who has worked in grain markets for a half century.

Processing of U.S. soybeans in the three months ended Aug. 31 was the lowest in seven years, Gary said. Importers shifted to cheaper supplies of soybean oil and meal from Argentina and Brazil and palm oil from Malaysia, said Gary, who predicted prices may fall as low as $10 a bushel.

The USDA in its report tomorrow at 8:30 a.m. in Washington may increase its estimates for soybean output and stockpiles, according to Bloomberg surveys of 30 analysts and traders. The prediction for U.S. production on average may be 0.6 percent higher than last month at 3.102 billion bushels. Inventories at the end of the marketing year may reach 186 million bushels, compared with an earlier forecast of 165 million bushels.

That would still mean a 6.8 percent drop in the harvest, the biggest decline since 2007, and a 13 percent contraction in stockpiles, the most in three years, USDA data show.

Vegetable Oil

Global soybean consumption surged 47 percent in the past decade, fueled by economic growth in China, India and Brazil that boosted incomes and demand for vegetable oil used in fried and baked foods, candy and breads. People also are eating more meat, increasing the need for livestock feed.

Over the past five global recessions, demand for soybeans, corn and wheat has grown by an average 2 percent a year, Morgan Stanley analysts led by New York-based Hussein Allidina wrote in a report Sept. 26. They reiterated their estimate for an average price of $14.25 a bushel in a report Oct. 9.

The International Monetary Fund cut its global growth forecasts to 4 percent for this year and next on Sept. 20, compared with earlier estimates of 4.3 percent for 2011 and 4.5 percent in 2012. Still, the economy is expanding, compared with a contraction in gross domestic product that the World Bank estimates was 5.2 percent in 2009.

‘Commodity Fundamentals’

“Markets fret way too much about the impact of a potential economic slowdown on food demand,” Mike Rahm, the chief market strategist for Plymouth, Minnesota-based fertilizer manufacturer Mosaic Co., said Sept. 29 in a conference call with analysts. “There is a tug of war taking place between powerful outside market influences and strong agricultural commodity fundamentals. Agricultural commodity fundamentals are just too strong not to win this contest.”

Global soybean consumption will increase 3.8 percent to 262.24 million metric tons in the year ending Sept. 30, 2012, the highest ever, USDA data show. Demand in China, the world’s biggest user and importer, will rise 8.6 percent to 71.6 million tons. Global reserves of cooking oils will shrink to 6.8 percent of consumption, a record low, the data show.

Soybean production is declining in part because farmers are choosing to plant more corn. A farmer in central Illinois, the largest U.S. grower after Iowa, can earn $151 more per acre of corn than on soybeans based on estimated costs and yields calculated by the University of Illinois and the price of crops on the CBOT during the harvest, Bloomberg data show.

Lower Yields

U.S. farmers may plant as much as 95 million acres of corn next year, the most since 1944, Mosaic’s Rahm estimated on the Sept. 29 conference call.

Soybean output in Brazil, the world’s second-largest grower and exporter, will drop next year for the first time since 2009 because of lower yields, the Agriculture Ministry said Oct. 6.

“All the bad economic news is priced into the market, and now the focus will switch to supply-side worries,” said Michael Swanson, the Minneapolis-based senior agricultural economist at Wells Fargo & Co., the fourth-largest U.S. bank by assets and a major farm lender. “Supplies are tightening because growth in consumption has not diminished.”

--Editors: Steve Stroth, Millie Munshi

To contact the reporter on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net


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