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Soybeans are posed for their biggest harvest ever in this calendar year, causing a drop in worldwide prices from around the $10/bushel mark less than two years ago to $5.70/bushel in the last few days. As a larger than expected crop becomes a reality, soybean stocks at the end of 2005 could reach as high as 350 M bushels, over a 1 month supply of the commodity, and the highest stock level in over 18 years. With such an extreme amount of soybeans on the market, the price level may very easily reach below $5/bushel, a level that has basically been the floor for the soybean market for over 10 years. With stock levels at an extreme level, the medium term outlook for soybeans may be towards the downside. However, the long term prognosis for soybean prices is quite healthy. From 1999-2002 when prices held steady around $5/bushel, many farmers quit the soybean market, and the next two years saw a doubling in price. With the cost of production already 20% higher than the current market price, many soybean farmers again may soon leave the soybean industry. If further price declines occur in the market, many more farmers will be forced to leave, resulting in a decrease in supply. In addition, weather patterns for the past two years in the major soybean growing states of the US have been ideal, achieving their highest yields ever. Substantially lower yields due to bad weather are inevitable sometime in the next few years. Drops in the price of soybeans may become a great buying opportunity for all of these reasons.
In addition, politics could very well become one of the biggest factors in the market. The largest producer of soybeans in the world, the United States, subsidizes over $1 Billion dollars a year to the soybean industry, causing the oversupply that has placed enormous downward pressure on prices. Recently, these outrageous monetary gifts have come under fire as unfair in WTO regulations. The results of this debate could have large ramifications not just for the soybean market, but for all agriculture markets in general. If Brazil can convince the United States to cut back on its subsidies, the soybean price may take off like a rocket. Soybean investors are advised to carefully watch these negotiations. The demand side of the equation looks equally promising. As Asia continues to grow and a larger middle class forms, demand for soy may grow exponentially. Not only is it the cheapest form of protein available, but many residents of the Japanese island of Okinawa attribute their freakishly long lives to the fact that they consume more soy than any other region of the world. Asian people in general do not drink milk from animals, in large part because most of them are lactose intolerant. Soy products are used heavily as an alternative. The Commodity Investor recommends a patient approach to playing the soybean market. Wait until the price drops below $5/bushel and then load up. |
