Long-term price cycles project 15-year high.
The long-term pattern in all commodity and soybean prices has shown lows every 30 years. For example, we experienced major lows in 1939, 1969 and 1999. The pattern is also in place for major highs every 15 years. Highs in 1973-74 were at $10.58/bu. and in June 1988 at $9.86. The 2003-04 high is now projected at $7.80-9/bu.
What created this bull market in soybeans? The following key factors combined to create the strongest rally we've witnessed in soybean prices in the last decade.
Strong global demand. China has turned into a huge cash customer for U.S. soybeans. Currently, it buys one out of every four bushels of U.S. soybeans. During the last 10 years, 12 huge soybean processing plants have been built along the coast of China, all running at full capacity. Crushers in China are more concerned with getting a constant supply of soybeans than they are about price.
The lower U.S. dollar. From 1995 until 2001 the super strong U.S. dollar kept U.S. soybean prices much higher than global competitors' prices. The strong U.S. dollar and the global recession into 2001 kept demand down and slowed U.S. exports. Now the 30% drop in the dollar has cushioned the world soybean price increase and kept the end products — soybean meal and soybean oil — competitive for the global consumer.
Reduction in U.S. soybean crop. The combination of drought and aphid infestations took a huge toll on the U.S. soybean crop this year. With the national yield down to just 34 bu./acre, the total crop is down more than 350 million bushels since the July USDA report.
No price rationing. The most recent U.S. census soybean crush report shows the U.S. crush rate running 8% over last year's — not the 15% less that USDA had projected. Soybean exports — year to date — are up a whopping 27% vs. the USDA projection of a 19% drop. Just seven weeks into the marketing year, export commitments are at 54% of the total USDA projection for the year. The longer this continues, the shorter the time window to ration supplies.
Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want more information, write: Northstar, 1000 Piper Jaffray Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail: [email protected].
What To Watch
The news is likely to be most bullish at the top. Watch these factors that may signal a high in the soybean market:
Cash basis bids widen as futures move higher. On the rally this summer, and now in the post-harvest rally, cash soybeans have gone up faster than the futures market, showing strong cash demand.
The differed futures market starts to gain on nearby futures. During the strong, cash-driven soybean market rally the last six months, nearby futures have been stronger than the futures contracts three to six months out. When the final herd of speculators rushes to buy, the greater strength in differed futures will be a clear caution sign.
The market fails to rally on bullish news. The soybean market opened lower and then rallied on bearish news. A clear caution signal will kick in when futures open higher after a bullish news event and then close lower. This will indicate that all of the bullish news is finally built in.
What to do: Stay disciplined. As a firm we've sold 60% of the 2003 soybeans on earlier recommendations and own part of those earlier sales back with call options. The rally could last into May 2004, so divide up cash soybeans and sell 5-10% of your inventory each week the soybean market closes higher. If nearby futures hit $9, consider selling the rest. And if you're still bullish? Buy a $10 call option and call it a year.