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2012 soymeal prices reach record-high levels

U.S. soymeal prices reached record levels this summer, and are expected to remain strong going forward, providing a solid foundation for soybean prices.

Because of hot dry weather, analysts expect a U.S. soybean crop that is likely to fall below last year's harvest, despite an increase in acreage. But demand for beans and meal is not dropping much -- especially foreign demand due to tight supplies of old-crop South American soy products after a short 2012 harvest in the southern hemisphere. With South American supplies tighter, major importers like China will need to ship soybeans from the U.S. instead of South America.

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Despite lowering its harvest estimate in July's monthly supply-demand report, USDA still predicted a 2.24 percent rise in U.S. soybean exports for the 2012-13 marketing year that starts Oct. 1. (As of the start of summer, even before the hottest temperatures, China had booked 350 million bushels of 2012-crop U.S. soybeans, up 52 percent from a year earlier. China has its own crushing plants, so it buys mostly beans and very little meal, say analysts.)

Providing an underpinning for the U.S. meal market is the strong price for corn. "Meal looks cheap when compared to corn," says Terry Reilly, commodity analyst at Citi.  Even if overall U.S. corn stocks aren't tight, it's tough for livestock feeders in the Delta and Southeast to tap supplies in the Midwest, he notes.

"The corn basis in the South is through the roof," says Reilly, citing difficulties in getting corn by railroad to southern livestock operations. That has encouraged some livestock feeders to substitute soymeal and soft red wheat for corn, he says.

One feeder looking at substitutes is David Wicker at Fieldale Farms, a poultry operation in northern Georgia. He's been shipping in soft red winter wheat from the Carolinas, as well as the eastern Corn Belt. "It's a fairly decent buy," says Wicker, who is both the nutritionist and operations director for Fieldale.

Like corn, wheat provides carbohydrates to livestock, but also contains about 10-12 percent protein, compared with about 7.5 percent protein for corn.

Wicker is also using some canola meal as a substitute for soymeal. He buys some from Canada and the Dakotas, but also has a source of canola locally. Some nearby farmers grow a winter canola that's harvested in the spring, and a small local plant crushes it.

The canola meal rates around 34-36 percent protein, says Wicker, compared with 45-48 percent for soymeal. So he limits his canola to no more than 10 percent of a ration. Wicker has also been using up to 7 percent meat meal, along with high-protein feather meal. He says he's also been using more amino acid supplements, such as lysine, when the numbers warrant it.

But when the numbers favor it, soymeal makes up about 35 percent of his rations, with corn around 60 percent.
However, one meal that's not warranted as a soy substitute at Fieldale is cottonseed meal, where Wicker says the price has been bid up by strong demand from dairy farmers.

Meanwhile, other feeding operations in the South have access to peanut meal, but Wicker avoids it due to scant supplies near his location in northeast Georgia. But if he were in Alabama or western Georgia, he says, he'd probably be using some peanut meal. If he were in Arkansas, he says he'd be looking at rice as a meal substitute.

Wicker is constantly crunching the numbers as he looks for the least expensive and most productive rations. With corn, meal and other feed-grain prices bouncing wildly virtually every day in this summer's heat, he's been very active in recent weeks in juggling pricing contracts and delivery schedules for his inputs.

Wicker uses a computer program to fine-tune his substitutions. But he says that his suppliers run the same program, so they can anticipate what blending adjustments he might make, allowing those suppliers to change their prices quickly before he places an order. That makes it hard for him to stay ahead of game.

Other Southeast livestock feeders are looking at substitutes such as fish meal and dried distillers grain (DDG), a corn byproduct produced by ethanol plants, says Mike Lacy, a poultry scientist at the University of Georgia. But except for feather meal at around 70 percent protein, many of these substitutes don't provide as much protein as soymeal. "It (soymeal) is such a great protein source that usage probably hasn't gone down much this year, despite the high price," says Lacy.

Even with substitution in rations, Citi's Reilly doesn't see much retreat for soymeal prices. Earlier this summer, even before the worst of the summer heat, he predicted that soymeal would top 2008's record high of $456. And he was right, with the August futures topping $554 earlier this summer. "A push to a new record at $500 would not surprise me," he said back in June. He notes that Canada started the growing season with some oilseed acres (canola) under water, which may reduce Canada's rapeseed meal output.

The price of soymeal is important to soybean farmers because meal currently accounts for about 62 percent of the price of the beans, up from a more normal level around 58 percent. Furthermore, U.S. livestock feeders have limited options for replacing soybean meal with another ingredient. Not only are supplies of other oilseed meals limited, but some hog farmers have been dissatisfied with their results from feeding alternatives, like DDGs, says Citi analyst Sterling Smith. Many are staying with soymeal, he says.

Currently, hogs consume about 24 percent of all soymeal that's fed to U.S. livestock. Overall, about 79 percent of all soymeal produced in the U.S. is fed domestically. (Nearly all of the rest is exported.) Of the 79 percent that is fed, beef cattle consume about 13 percent and dairy cattle about 7 percent. Poultry consume about 55 percent -- out of the  30-31 million tons or so that are fed domestically each year.

After hot weather for the past two months and little rain for even longer, soymeal prices took out their 2008 highs even before midsummer. That prompted USDA to raise its projection of 2012-13 average prices by $30 a ton, or about 8-9 percent, in its July supply-demand report, over its June estimate. A new estimate will be released Friday, Aug. 10.

For the 12 months beginning Oct. 1, USDA now sees 2012-13 soymeal prices to average just as high, or higher, as the 2011-12 average. 

Even old-crop 2011-12 meal prices saw USDA raise the projected year-long average price by $5 a ton, or nearly 1.4 percent, between the June and July reports. That crop year ends Sept. 30, so most of the year is over. What USDA said is that soymeal prices will be up enough in the final three months of meal year to raise the entire 12-month average by $5 a ton. 

To put it in perspective, USDA sees current 2011-12 soymeal prices to average 5.6 percent higher than 2010-2011, and next year's meal prices could average as much as 14 percent higher than 2010-11.
In the July supply-demand report, USDA lowered its estimate of the upcoming U.S. soybean crop. USDA also lowered new-crop soybean crush, reducing projected soymeal production for the new crop year. But in that report, USDA did not tighten projected meal carryover stocks. Instead, USDA lowered U.S. soymeal exports. That allowed USDA to project continued strong domestic feed demand even while cutting U.S. soymeal production.

In other words, USDA's July projection of total U.S. 2012-13 soymeal supplies was down 2 percent from June, but projected domestic feeding is expected to drop only 1.6 percent. When compared to last year, USDA expects total U.S. meal supplies to drop 5 percent, but feeding is projected to drop only 3.3 percent. USDA has made up the difference by lowering expected U.S. meal exports. U.S. exports of new-crop soymeal are expected to drop a hefty 12.9 percent over the current old-crop year, a drop of 3.57 percent between June and July.

By lowering exports, USDA has not yet tightened meal carryout stocks, but such a move on Aug. 10 or later would provide an underpinning for meal prices well into fall. That would put the market at the mercy of planting reports and field conditions coming out of South America. The first new-crop Brazilian soybeans aren't expected to leave the field until January, with the bulk of the harvest around March.

But today's market isn't looking that far out. Most participants are simply wondering how August weather will turn out.

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