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Grain analyst - 2014 soybean outlook - December 2013

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Grain analyst - 2014 soybean outlook - December 2013 …

Grain analyst - 2014 soybean outlook - December 2013

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 designed 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 seenin 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.

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  • 1. 2014 soybean Outlook 1
  • 2. 2014 soybean Outlook 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 designed 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. DEMAND When 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. 2 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. 2014 soybean Outlook 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 ACRES While 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 alltime 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- 3
  • 4. 2014 soybean Outlook 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., soybean 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. 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 production 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. SUPPLY The 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. 4 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. 2014 soybean Outlook 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 projections 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 marketing. 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. 5
  • 6. 2014 soybean Outlook If one of the two variables from the supply section would occur, we project U.S. CASH soybean prices to trade between $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 ACTION Based off this analysis, we recommend that an early marketing 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, soybean 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 historically 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 6 the soybean story will come with plenty of rumor and innuendo 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 circumstances. 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 successful 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 expect 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. 2014 soybean Outlook DISCLAIMER THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION. THIS MATERIAL HAS BEEN PREPARED BY A GRAIN ANALYST BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION 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 OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL 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 RECOMMENDATIONS CONTAINED THEREIN. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS. 7 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 ACCESSED 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 PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICES. 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.