Todd's Take

Tue. Jul 07, 2015 8:56 AM

By Todd Hultman
DTN Market Analyst

I understand if readers tire of hearing me talk about soybean demand this year and how it has been repeatedly underestimated by USDA and the market in general. However, this is turning out to be one of the two most fascinating stories for grains in 2014 -- rain being the other -- and USDA just gave us more ammunition in last week's report of June 1 supplies.

On June 30, USDA said there were 625 million bushels of soybeans on hand as of June 1 and, had soybeans traded lower on report day, headlines would have reminded us that soybean prices were cursed by record high plantings and the highest supplies in three years. Instead, November soybeans jumped up 57 1/4 cents and headlines cited less-than-expected supplies.

As a guy who listened to Senior Analyst Darin Newsom make a bullish case for soybeans as far back as January, I also wrote about this theme of soybean demand being stronger than expected back on Feb. 24 ("Soybeans Looking Up") and Apr. 7 ("Just Between Us"). It was gratifying to see June stocks come in at 625 million bushels, but I still get the sense that most do not understand how bullish this is for soybean prices.

The key for understanding demand isn't just the amount of soybeans on hand, but the pace of disappearance. After last fall's record U.S. harvest, the 2014-15 season began with an estimated 4.068 billion bushels of soybeans. Having 625 million bushels on June 1 means that 85% of soybeans are gone after three quarters.

In the past 10 years, soybean use in the fourth quarter has ranged from 9% to 16% of beginning supplies. Obviously, we don't have enough beans for 16% use this year. The two years that showed only 9% use in the fourth quarter also had cash soybean prices above $12 per bushel to help ration demand.

Just as a guess, let's say demand totals 11% of beginning supplies in the final quarter. That leaves ending stocks of 178 million bushels for 2014-15, far below USDA's current estimate of 330 million. Guessing the final number is tricky, but it is likely to be significantly lower than most are currently expecting and every bushel removed in 2014-15 also comes off the ending stocks estimate for 2015-16.

For those still stuck on the idea that June 1 supplies were the highest in three years, you should know that over the past 12 years, there is a strong negative correlation of 94% between the percent of soybean disappearance in the first three quarters and the ending stocks-to-use ratio. If the historical pattern holds true, this year's disappearance of 84.6% by June 1 suggests a U.S. ending stocks-to-use ratio of less than 5%. Once again, that is far below USDA's current estimate of 12.7% and points to higher soybean prices ahead.

Where are all the beans going? The strong early pace of exports is waning, but the incentive to crush soybeans here in the U.S. remains strong. Crush premiums based on July and August futures contracts are at $1.88 and $1.81 per bushel, respectively; among the highest incentives for both over the past eight years.

With DTN's national index of cash soybean prices near their highest prices in 2015, many producers have taken advantage of the recent rally to cash in and that is understandable. However, if the current pace of demand stays near its historical pattern, there should still be higher prices ahead. USDA's September 30 Grain Stocks report is on track for a bullish surprise.

Todd Hultman can be reached at todd.hultman@dtn.com

Follow Todd Hultman on Twitter @ToddHultman1

(CZ/BAS)

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