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U.S. soybean stockpiles are poised to drop to the lowest level relative to consumption since at least 1965, after the worst drought in five decades decimated crops across South America, driving China to buy more from Midwest farmers. This bodes well for U.S. soybean farmers who are placed to meet this rising demand. Reflecting the same, benchmark CBOT May soybeans gained 31 cents to $14.46-3/4 per bushel in the last week of April. The crop prices are expected to touch $16 a bushel by end of June 2012, according to Linn Group. Soybean had set price record highs of $16.3675 in 2008. We will now look at the factors that could support higher prices in this harvest season.

Falling Stock Piles

Bloomberg estimates of 31 analysts show soybean inventories declining 20% to 172 million bushels (4.68 million metric tons) before next year's harvest in the U.S. According to Roy Huckabay of Linn Group, U.S. reserves of the crop before the 2013 harvest would be the equivalent of 2.6% of projected consumption of 3.363 billion bushels. The lowest stockpiles-to-use ratio was 4% in 1965, the earliest that government data is available, when production was 77% smaller than in 2011.

Dwindling Production in South America

Since the 2009 drought, production across Brazil, Argentina, Paraguay, Uruguay and Bolivia will drop 16% this harvesting season. Moreover, the USDA had cut its forecasts for the South American crop four times in as many months after predicting record supplies as recently as December 2011. Also, Archer Daniels Midland (NYSE:ADM) and Bunge (NYSE:BG), the world's largest grain processors, have reckoned that fewer South American exports would make it "difficult to buy beans going forward."

Rising Chinese Demand

Chinese demand for the crop has doubled since 2004, with the USDA projecting it to touch 55 million tons in 2012. Chinese hog herd expanded at an average rate of 4.4% in 2011 to a record 690 million animals. Chinese have failed to keep up with the demand for soy-based animal feed, vegetable oil, and biofuel in the world's most populous nation, where the economy expanded 9.2% in 2012. The harvest was 13.5% in 2011, down from a peak of 17.4 million in 2004. Consumption is up 36% in the past three years to an estimated 70.1 million tons, or 28% of global use. China's goal to attain developed country status is progressing at full speed, and I have already discussed how it strains the regions natural resources in my article "Food For Thought: China's Protein Story."

China's Rising Imports

China's soybean imports have grown at a rate of more than 17% annually in the last 10 years, and the biggest risk is that demand won't slow. China had bought 921,642 tons of U.S. soybeans in the four weeks ended April 26, 2012, which is three times the amount a year earlier. About 7.12 million tons have been booked for shipment in the year that starts September 2012, which is 21% more than levels witnessed last year. Also, the USDA had recently announced that exporters sold 225,000 metric tons to China for delivery before Aug. 31, 2013.

Rising Speculators' Interest

Hedge funds have raised their stakes in the crop since at least June 2006. According to CFTC data, hedge funds held a net long position of 253,889 contracts as of May 1. It should be noted that speculators were wagering on a retreat as recently as December 2011.

Corn Planting Profitability Overshadows Soybean

A last word on corn, which is still more profitable to plant than soybeans. Farmers are expected to plant around 96 million acres of corn this year, the most since 1937. This could limit gains in soybean planting, while boosting corn output by 7.7% to 14.395 billion bushels, according to the average estimate in the Bloomberg survey. I have written about the impact of this factor in my article "Corn Acreage At 96 Million Acres: Spotting The Winners."

Investors can look into the following options to get exposure to this crop:

  • Teucrium Soybean Fund (NYSEARCA:SOYB)
  • Bunge
  • Archer Daniels Midland
  • Mosaic (NYSE:MOS)
  • Monsanto (NYSE:MON)
  • Potash Corporation of Saskatchewan (NYSE:POT)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Tight Soybean Supplies: Pointers For Higher Price Levels