Are soybeans the new sheriff in town?
Soybeans have taken over the leadership of the grain market the past week, rallying to new highs while corn languishes at old price levels near $4.00. Not only did the March soybean futures run to new highs, but also the Nov. 07 and Nov.08 contracts, meaning this may not be just a short-term supply shortage in soybeans this year.
In fact, soybean supplies have never been larger than the current 575 mb projected carryout in the US. But futures markets look to the future, and it doesn't take a rocket scientist to figure out what will happen to US soybean carryout if we switch 10 million acres of soybeans to corn in 2007, and then add to that total for the 2008 crop year. Eventually, it doesn't take long to project a shortage of soybeans - even though we currently have record carryout.
This is perhaps the best thing grain farmers could have hoped for, with an unusually large new demand for US grains coming on-line, a demand we can see (ethanol plants being built) and even plan ahead for (it takes 12-24 months from inception to completion of a plant). While at times it appears too good to be true to see such a large change in market perception from last year at this time, it also doesn't seem like the market will find an easy/quick solution to the current situation.
Until we find a way to meet the new demand for fuel as well as the existing demand for food/feed, the market is left to deal with this situation on its own. Markets will work, as they almost always do in the end, but the means to the end is what is holding everyone glued to their crystal balls. Everyone wants a clue to the eventual solution and the steps the market must take to solve it.
Often times the market deals with things in a way that is totally unexpected, so it may be somewhat an exercise in futility to make projections at this point. But there are a number of factors and possibilities that could help solve the acreage problem that is currently plaguing the marketplace.
1. Crude oil prices could crash below $30, in effect ending the ethanol gold rush that investors are currently pursuing. This would make ethanol plants unprofitable, and thus end the current seemingly impossible situation to feed all the additional ethanol plant construction. Yet, recently crude prices have risen nearly $10 from $50 back to $60- not the solution we've been looking for.
2. Ethanol subsidies could end, with the public making a decision without additional market pressures to subside their support for alternative fuels. But wouldn't this also send the wrong signal to those investors who have pursued our nation's stated goal of energy independence- just when they seem to be making some successful progress?
3. Livestock feeders could cut corn feed use significantly by cutting livestock numbers, with the current prices eventually doing its job. But so far, there hasn't been much sign of this from the market. Does it just need more time to finally work its magic?