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In This Issue:

In this Issue, Donna Heidkamp discuses Soybeans Growing Season, The Producers, and the Acreage Wars.


09/20/2007 TraderSavvy.com | Read Past Issues
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A Fundamental Look at Soybeans

The acreage war for 2007-2008 is already on the top of everyone’s mind. Soybean production in the U.S. is at risk of losing acreage to corn over the years, as a result of the large push for ethanol and biofuels. Which crops will get the acreage, between soybeans, corn, cotton, and wheat? With the high price of soybeans and wheat relative to corn and cotton, it only makes sense that farmers would give stronger consideration to planting soybeans and wheat than corn and cotton at the moment. Keep in mind, a lot can change between harvest time and planting time over the course of six months. Soybeans are an important crop for the U.S. They are typically the second largest revenue-generating crop (behind corn) in the U.S. Once soybeans are harvested, they are crushed into soymeal and soybean oil. Soymeal is predominantly used for feed purposes. Soybean oil is used for food oils, industrial supplies (such as paint and plastics), and biodiesel production. It accounts for approximately 90% of the U.S. oilseed production yearly. In an effort to take a closer fundamental look at soybeans, I will discuss the growing season, the primary soybean producers and buyers internationally, and reasons that the price is maintaining high levels—the fight for acreage.

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( continued from above... )

The Growing Season

During the growing season, many factors affect the size of the crop—particularly weather.

Planting season for soybeans typically runs from May through mid-June. There are a few varieties of soybeans that can be planted as late as early July though. Adequate moisture in the winter and spring can greatly benefit the start of a good crop. Once the soybeans are planted, the seed must reach a moisture content of 50% to start germination. After emergence, soybeans are considered to be a much hardier crop than corn. The flowering stage takes place from mid-July to early August, depending on when the crop was planted. Excessive heat is not desirable during the 2-3 week flowering stage. At that stage, it can have a greater impact than lack of rain. Therefore, it is beneficial for the soybean growing areas to receive moisture around mid-July. However, many varieties can flower again if the plant is stressed during part of this stage. The next critical stage for moisture and temperature takes place during germination in August, when the pods are filling. Finally, the harvest typically runs from early September through October in the Midwest. Further south, harvest might take place in November where double cropping occurs.

The Producers

On a world level, Argentina and Brazil started becoming active in soybean production in the 1960s and 1970s—when large corporations looked for opportunities to expand their business. They have significantly increased production over the past two decades as a result of improved infrastructure, which has led to more competition for soybean exports. However, it is important to keep in mind that many infrastructure improvements are still needed to maximize their production potential.

In the early 1970s, the U.S. accounted for 95% of the world soybean export market. Today, the U.S. has less than 50% of the world export market. Although Brazil and Argentina’s presence in the world export market is strong, it has eased over the past couple of years. This was a result of drought issues, soybean rust, and a strengthening currency relative to the U.S. dollar. For the 2007-2008 crop year that is currently being planted in South America, increased acreage is expected. It is believed that approximately 20% – 25% of next year’s crop is already forward contracted.

Other countries that are the large producers on a world level include China and India. Although China’s production has also been on the rise over recent years, their demand has also been on the rise. They import approximately 50% of their demand annually.

Acreage War

The acreage war is continually heating up as demand for corn, wheat, soybeans, and cotton continues to grow. Whichever crop is the most profitable and fits into rotation patterns for the farmer will win out.

We are currently experiencing high prices in the soybean market going into harvest as a result of:

  • Significantly lower acreage in the 2007 crop from last year is pressuring the stocks to use ratio.
  • The European bean oil demand has been higher than normal, as a result of abnormal weather conditions that affected their oilseed and wheat crops this year.
  • The demand for bean oil in biodiesel fuel production is on the rise.
  • The weaker U.S. dollar is supporting U.S. exports.

With the higher prices relative to corn, the soybean and wheat markets are expected to capture acreage in 2007-2008 versus 2006-2007 domestically. According to The Hightower Report , an increase of 4.5 million to 8.5 million acres is expected for 2008 versus 2007. This would correspond to a stocks-to-use ratio of 3.0% to 8.6% on the high end. Compare this to the 2006-2007 crop year, based on the August 2007 USDA monthly report, the stocks-to-use ratio is 7.4%.

According to the USDA, the U.S. acreage war might be eased somewhat as the set aside land for the Conservation Reserve Program becomes active again. This land is generally considered to be less desirable farm land though, and might not have that great of an effect as expected on total production. According to the USDA, the key to increased growth in the soybean sector is increasing the yield potential to lower the cost per acre to the farmer.

To conclude, the long-term trend in soybean demand appears to point to higher prices to help ration supply. Unless we find more acreage globally to plant soybeans, the days of 5.50 soybeans are likely a thing of the past. The monthly chart below highlights key long-term support and resistance based on the front month contract. (It is important to note that these levels change with time.) Volatility tends to increase on a day to day basis as prices become overbought. If you are trading the soybeans, it is recommended to increase the risk capital used to trade or reduce the number of contracts you trade as the prices rally and become more susceptible to volatility.

Support: 903 1/2 ; 809 ½

Resistance: 1063 3/4

soybean chart

The risk of loss in trading commodity futures and options can be substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.

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About Today's Author:

My interest in the futures industry stems from strong family ties to production agriculture in Hereford, Texas. After completing a bachelor's degree in Agricultural Economics at Texas Tech University in 1995, I moved to Chicago to participate in the Chicago Mercantile Exchange Agricultural Broker Training Program. The program exposed me to all facets of the futures industry, enabling me to work with experienced floor traders and develop a strong understanding of the intricacies of trading in the futures markets.

Since completing the training program in 1995, I have continued to gain a well-rounded knowledge of the industry by working as an order clerk, trading desk manager, and broker for RJOFutures. In 2004, I started a branch office of RJOFutures to focus my efforts on helping clients meet their trading goals. By identifying client objectives, managing risk, and providing a carefully tailored service, I serve as a dedicated liaison on all trading floors to full-service, broker assist, and on-line clients.

In order to continue to better serve my customers in an ever-evolving and dynamic industry, I also completed a M.S. degree in Financial Markets and Trading from the Illinois Institute of Technology in May of 1999.

RJOFutures is the retail division of R.J. O'Brien, one of the oldest FCMs tracing its history back to 1914. To learn more about RJOFutures, visit rjofutures.com