With the $1+ selloff in the soybean market over the past 2 trading days, some commodity analysts are suggesting the "highs are in" and that the market has "priced in" any damage triggered by the Midwest drought. Others market prognosticators have suggested that there is "still ample time" for this crop to improve and that with a little rain, good yields could still materialize. It is my contention that all of these conclusions are likely wrong.
When the USDA released its World Agriculture Supply and Demand Estimates report earlier this month, it pegged the US Soybean crop at 3.05 billion bushels. Based on the USDA's current estimate of harvested bean acreage, this translated to a yield of approximately 40.5 bushels per acre (BPA). If realized, this would result in a drop of just a single BPA from the nation's soybean yield recorded last year. Given the duration and severity of the Midwest drought, the USDA's BPA figure is simply too optimistic.
Unlike most growing seasons when the size of the soybean crop is largely established during the last week of July through about the third week in August, this year's crop went into the ground 2-3 weeks early. Consequently, the key "pod setting" stage in the maturation of the soybean plant is occurring 2-3 weeks early in 2012---in arguably some of the worst weather conditions in 50 years.
In Monday's USDA crop progress report, 36% of the entire US soybean crop was already setting pods as of July 22, 2012, compared to just 13% of the crop at the same date a year ago. The following table details pod setting percentages by state in America's ten largest soybean acreage states.
% of Total US Soybean Acreage | % Setting Pods | |
Iowa | 12.49% | 36% |
Illinois | 11.30% | 40% |
Minnesota | 9.20% | 43% |
Missouri | 6.97% | 16% |
Nebraska | 6.70% | 27% |
Indiana | 6.57% | 32% |
Ohio | 6.05% | 21% |
North Dakota | 6.05% | 62% |
South Dakota | 5.91% | 27% |
Kansas | 4.73% | 10% |
Total US | 75.97% |
*Source USDA Acreage Report and Crop Conditions Report
Without a doubt, conditions across most of these states have been abysmal for pod setting. Throughout the past 2-week period, daytime high temperatures have reached 100 degrees or higher across the majority of the soybean belt, far exceeding optimal temperature for pod setting conditions (the mid-80s). This factor, coupled with persistent dry soil conditions, has placed most soybean plants under significant stress. Under such conditions, soybean plants are more apt to abort their pods. Consequently, final yields in areas where the soybean plants have already set pods are sharply reduced.
This is best represented in the weekly crop conditions report. Again, according to USDA data, just 31% of the national soybean crop was rated in good or excellent condition as of July 22, 2012 However, in the top producing states, conditions are sharply below their level a year ago when compared to the same stage of overall plant development.
For comparison purposes, I reviewed the USDA's crop progress report from July 31, 2011 when 34% of soybean crop was setting pods. At that time, 60% of the nation's soybean crop was rated in good to excellent condition.
In the top 10 producing soybean states, each state experienced a decline in their relative condition at the same point in the maturation process compared to a year ago.
Good/Excellent | Good/Excellent (7/22/12) | % Change in | |
Iowa | 76 | 28 | (48) |
Illinois | 58 | 13 | (45) |
Minnesota | 70 | 65 | (5) |
Missouri | 47 | 8 | (39) |
Nebraska | 75 | 28 | (47) |
Indiana | 44 | 12 | (32) |
Ohio | 55 | 20 | (35) |
North Dakota | 68 | 59 | (9) |
South Dakota | 70 | 34 | (36) |
Kansas** | 29 | 14 | (15) |
**None of the KS soybean crop was rated excellent as of 7/22/12 | |||
Incidentally, the only states in which soybean conditions improved from a year ago (albeit slightly) were Arkansas, Louisiana, Mississippi, and North Carolina. Collectively, these four states represent 10.7% of the nation's total soybean acreage.
With the soybean crop maturing in poor conditions and with general crop conditions in much worse shape than a year ago, one can only extrapolate that final US soybean production will be much less than a year ago.
In fact, simply reducing yields in the states most impacted by the drought by 10% from their 2011 levels would reduce the size of the US soybean crop to 2.83 billion bushels. However, this number is likely conservative, since yield losses of 20% (or more) will be common in the Kansas, Missouri, Illinois, and Indiana.
2011 Final BPA | Est. 2012 BPA | Production Est. | |
Iowa | 50.5 | 45.5 | 429,048 |
Illinois | 47 | 42.3 | 362,511 |
Minnesota | 38.5 | 38.5 | 266,420 |
Missouri | 36.5 | 32.9 | 172,463 |
Nebraska | 53.5 | 48.2 | 243,158 |
Indiana | 45 | 40.5 | 202,095 |
Ohio | 47.5 | 42.8 | 196,223 |
North Dakota | 28.5 | 28.5 | 129,675 |
South Dakota | 37 | 37.0 | 164,650 |
Kansas | 27 | 24.3 | 86,265 |
Arkansas | 38 | 39.0 | 124,800 |
Mississippi | 39 | 41.0 | 86,100 |
Michigan | 44 | 39.6 | 78,804 |
Wisconsin | 46 | 41.4 | 69,552 |
North Carolina | 30 | 35.0 | 57,050 |
Tennessee | 32 | 28.8 | 37,152 |
Kentucky | 39 | 35.1 | 48,789 |
Other US States | 79,086 | ||
Totals for US | 41.5 | 2,833,840 | |
*The 17 states listed above represent 94.4% of expected harvested US Soybean acreage | |||
**Crop Conditions are down only slightly in MN and ND; thus the 2011 final BPA was used | |||
**South Dakota yields were well below trend in 2011; thus the final 2011 BPA was again used | |||
***Yields were increased slightly in AR, MS, NC reflecting higher G/E ratings vs. G/E rating in 2011 | |||
****Yields in states severely impacted by drought were reduced by 10% | |||
In addition, last week state regulators ordered Nebraska farmers to cease irrigation in order conserve what water is left. As a result, significant yield reductions to both corn and soybeans are now likely across that state since much of the state's farmland is irrigated.
Accordingly, I believe the US soybean crop likely will not exceed 2.75 billion bushels in 2012-with the caveat that this number will likely fall further since many planted acres won't be harvested later this fall. (The USDA is also too optimistic in its assumptions about the percent of acreage which will actually be harvested.)
The wild card, of course, remains Iowa. Should temperatures remain over 90 degrees into next week and if rain fails to materialize Wednesday night and over the upcoming weekend, another 500 million bushels could quickly come off final US soybean production totals.
At the moment, the soybean market's primary function is to destroy at least 10% of demand to offset this projected decline in supply. If that is the case, then November soybeans priced at $16 is an insufficient price to destroy enough demand.
Accordingly, the current break in soybean prices should be seen as an opportunity to reenter this market from the long-side.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am long a single $20 November soybean call.
