soybean pods

What determines the price of soybeans? The quick answer is supply and demand. But the real answer in the short-run is how much someone will pay. So the question may be appropriate this year, “If beans are already $11 per bushel, why can’t they be $15 per bushel and set new all time highs? The analogy to the years from 1973 to 1975 when world prices were adjusting to new international economics makes the question not so ridiculous!

What should soybeans be worth in a world of $100+ crude oil, potentially $1,000 gold, nearly double digit annual income growth rates in China and India representing 1/3 or the earth’s appetites, and with the cheapest U.S. dollar in modern times?

June 5, 1973 was the day the July 1973 soybean futures set the all time high at $12.90 per bushel. That was an extraordinary summer. Even more startling is the fact that the average farm price of soybeans in the previous five crop years from 1967 to 1971 was only $2.63 per bushel. Thus, the $12.90 futures high was nearly five times that average farm price from preceding years. A similar adjustment today would send soybeans from the farm price average of $6.11 per bushel for the 2002 to 2006 crops to $30 per bushel.

Much like today, in 1973 to 1975 prices for all kinds of commodities and goods were being adjusted around the globe. I was a soybean trader for one of the largest crushers in the U.S. and world at the time. There was one highly respected University soybean economist of the era saying beans would not move above $4.00 per bushel, then was forced to redraw the maximum price line at $5.00 per bushel, before finally giving up. I had the rare privileged of being on the floor of the Board of Trade on January 19, 1973 when the lead soybean contract achieved the “unreachable” $5.00 mark and soybean prices did not look back for several years.

There is no precise way to measure just how high a repeat of the 1973 to 1975 period would propel soybeans today. One feeble attempt is to adjust the average prices received by farmers for inflation and yield differences back through time. A quick analysis to adjust to 2007 prices and yields suggests average annual farm prices would need to be in the $12 to as high as $17 range.

Most would argue that a repeat of 1973 to 1975 conditions is not a possibility today. The leading reason for that argument would be the proliferation of soybean production in South America. In the 1972/73 marketing year, South American soybean production represented less than 1% of world soybean production. Amazingly, for the current 2007/08 marketing year, South America is expected to produce 54% of world production. With two major crops coming 6 months apart, the world is much less vulnerable to be starved for soybeans as occurred in the summer of 1973.

This most likely tells us that it would require restricted production in South America due to rust or poor weather for soybean prices to retest the $12.90 all time high in 2008. Having said this, soybean prices have at least started on that potential path. The high so far on the nearby contract (January 2008) has been $10.88. Nearby futures prices peaked three previous times in this neighborhood: In April 1977 at $10.765; in June 1988 at $10.995, and in April 2004 at $10.64 per bushel. If soybean futures trade above $11.00 some traders will look to the soybean price summit—the $12.90 all time high with renewed interest.

These are lofty prices, but the issue of whether soybean prices have been high enough so far this year may not have been answered. With China an aggressive buyer trying to limit internal food inflation, and given the weakness of the U.S. dollar it is not convincing that exports will be trimmed as much as USDA now has budgeted. Surging crude oil prices put new upward pressure on soybean oil prices and meal demand appears robust with too many hogs to feed this winter, higher cattle feedlot placements in the past three months and faster growing broiler production. Then there is the potential for smaller U.S. yields in the January final crop report from USDA, and the always present possibility of weather or disease worries in South America.

Given these uncertainties, what should the price of soybeans be? The answer may well be higher than $11.00 per bushel. Then there is the valid argument that very good yields in South America with 6% more acres and even more soybean acres in the U.S. next summer could clearly tilt the price trend downward. Overall this means the possibility exist for $13 soybean futures and for $9.00 futures and it is possible to see both in 2008. High volatility means high margin risks for both soybean producers and soybean product users in 2008. So, manage accordingly.

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