August 01, 1999
by Melissa Alexander
Prices expected to remain under pressure indefinitely as global supply glut persists.
The world is awash with oilseeds, prices are at "historic lows," and the situation is not expected to change any time soon, according to just about every market observer as the 1999-00 crop year gets under way.
Indications of potential oilseed surpluses have been evident for some time, but each passing month has brought ever-larger estimates of their scope. As of mid-July, projections called for 1999-00 world oilseed production to exceed 300 million tonnes for the first time and ending stocks to expand by at least 12% from the already burdensome levels accumulated at the 1998-99 season's end.
Oilseed markets have responded by taking an emphatically bearish direction not experienced in decades. Except for a short-lived rally in late February and early March, Chicago Board of Trade soybean futures have moved inexorably lower and by early July were trading just a few U.S. cents above U.S.$4 a bushel, a psychologically significant level that equates to about U.S.$147 a tonne. The last time a U.S. soybean futures contract traded below that price was April 2, 1973.
U.S. cash prices by mid-July had dropped below U.S.$147 a tonne in some locations, reaching 27-year lows. Some market observers have predicted that soybean prices would drop by another 5% to 10% before finding a bottom toward the end of 1999.
Price pressure has not been limited to soybeans. European rapeseed prices have plunged by 31% since November, while European sunflowerseed prices have dropped by 20% since December.
A key reason for the price weakness in the oilseed complex is the expected huge increase in the U.S. soybean harvest. U.S. farmers increased 1999 soybean plantings by 3.5% from the previous year, and output, barring weather problems during pod-setting, should surge by more than 6% to a record 79.9 million tonnes.
The increase in U.S. soybean area was not unexpected, but the extent of the actual increase was greater than anticipated a few months ago. Despite the clear signal of declining market prices, U.S. farmers had a huge incentive to plant soybeans — the level of soybean support prices relative to supports for maize, which competes with soybeans for planted area.
U.S. support prices were established in 1996 farm legislation at the equivalent of U.S.$74.40 a tonne for maize and U.S.$193.27 for soybeans. Although the maize support level is about 1.2 times greater than the break-even price for maize (cash production costs only), the soybean support level offers a 1.78-to-1 advantage over the comparable soybean break-even price.
Soybean farmers in other producing nations are not expected to follow the U.S. lead. Virtually all observers predict that Brazil, the world's second-largest producer, will reduce planted area when sowing begins later this year.
The U.S. Department of Agriculture and the Brazilian agricultural consulting company Safras y Mercado both recently projected 1999-00 Brazil plantings at about 12.5 million hectares, down 3% to 5% from 1998-99. On the other hand, one U.S. analyst suggested that the soybean market would continue to plummet, remaining under pressure until it worked low enough to encourage a 20% reduction in Brazil's plantings.
Besides soybeans, production increases of up to 15% are anticipated for rapeseed, peanuts, copra and palm kernel. Meanwhile, world use should increase by a mere 4.4%. Crush will be affected by slower growth in livestock production, which will keep a lid on meal demand.
Bearish factors are expected to dominate until at least June 2000 because of the supply/demand imbalance.
Rapeseed output could surge beyond current expectations if China switches area from winter wheat, as a recent news report suggested. The report indicated that farmers in provinces south of the Yangtze River could lose price protection on the next winter wheat crop, forcing a switch to rapeseed, the only other major fall-planted crop.
China in 1998-99 harvested about 10 million tonnes, and such a switch could boost production by 25% to 50%, according to the report.