Todd's Take

15 Sep 2015

By Todd Hultman
DTN Market Analyst

Just one year ago, USDA estimated U.S. ending soybean stocks for 2014-15 at a hefty 475 million bushels, based on 3.583 billion bushels of total use. As DTN Senior Analyst Darin Newsom pointed out as early as January 2015, and as I wrote about in the article, "Just Between Us" in April, USDA has a history of underestimating soybean demand and it is happening again in 2014-15.

On Friday, USDA confirmed those suspicions by adjusting the 2014-15 ending stocks estimate down to 210 million bushels and another reduction is possible after the final Grain Stocks report, due out on Sept. 30. Much like the previous season when USDA's ending stocks estimate of 295 million bushels in July 2013 evaporated to a record low 92 million bushels by the end of the season, USDA's big miss unnecessarily depressed soybean prices at a time when net farm income is expected to be down 36% and U.S. soybean crop receipts are expected to be down $3.4 billion from 2014.*

If underestimating soybean demand happened roughly half of the time, we would treat it as a normal forecasting error, but a look at March WASDE reports, just five months ahead of the season end, show USDA is on track to underestimate soybean demand for the 12th time in 13 years. For U.S. producers, USDA's misses have become an expensive habit that causes soybean prices to trade lower than they otherwise would -- a de facto subsidy for China's purchases.

Given USDA's chronic short-sightedness, it is easy to look at Friday's ending stocks estimate of 450 million bushels for 2015-16, based on 3.725 billion bushels of total use and wonder how far off that will be by the end of the season. Currently, the popular view is soybean demand will be lower in the year ahead because China's economy is slowing. Adding to those fears, U.S. export commitments of all soybeans in 2015-16 are down 33% from a year ago as of Sept. 3.

However, is the slow start of soybean sales due to a real drop in demand or is China waiting for this year's large harvest to pressure prices lower? There are plenty of clues to suggest that China's demand for soybeans remains strong, but here are my top two. First, trade data from the U.S. Census Bureau's report of Sept. 3 shows that China's year-to-date imports of distillers grains in 2015 are up 20% from a year ago.** Like soybeans, distillers grains are another source of protein that China needs.

Second, China has bought so many soybeans from Brazil this year that USDA's estimate of Brazil's ending soybean stocks for 2014-15 has dropped from 411 million bushels in January to 125 million bushels as of Friday.*** In spite of China's bearish headlines, it seems clear that their appetite for soybeans remains intact.

At this point, I would typically argue that soybean prices are too low and should trade higher once we get past harvest, but there is one more bearish possibility to consider, namely Argentina's 609 million bushels of ending stocks.

Argentina's soybean supplies have not been a bearish threat to soybean prices so far because their exports have only been about one-fifth the amount that comes out of Brazil. Argentina's President Cristina Fernandez de Kirchner has infuriated farmers with a soybean export tax of 35% that works to keep exports low, but that may soon change.

On Oct. 25, Argentina will vote for a new president and the current frontrunner is Daniel Scioli. Mr. Scioli is considered close to the current president, but his views on export taxes are not well-known. It is no secret that China has made large investments in Argentina and Argentina's soybeans are high on the Christmas wish list. Adding to those suspicions, BuenosAiresHerald.com reported on Aug. 11 that shortly after Scioli won the August primary, he travelled to China and Russia to "ratify agreements that had been signed with the countries for public works."****

It is too early to tell if China will succeed in obtaining more soybeans from Argentina, but it seems clear that their growing demand for more protein in the national diet continues. From the perspective of U.S. soybean growers, it would sure help for USDA to catch on.

* USDA Highlights From the 2015 Farm Income Forecast at:

http://www.ers.usda.gov/…

** USDA's Global Agricultural Trade System at:

http://apps.fas.usda.gov/…

*** USDA Oilseeds: World Markets and Trade, Sept., 2015 at:

http://apps.fas.usda.gov/…

**** "Scioli to travel to China and Russia after win," BuenosAiresHerald.com, Tuesday, Aug. 11, 2015:

http://www.buenosairesherald.com/…

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

Follow him on Twitter @ToddHultman1

(CZ/BAS)