Column: USDA’s Outlook for U.S. Soybeans Might be too Hopeful

(Reuters) – It is common for market participants to be skeptical over supply and demand forecasts from the U.S. government, and that may be the case heading into the 2019-20 U.S. soybean marketing year as initial outlooks may be too optimistic.

The U.S. Department of Agriculture last Friday unveiled its initial forecasts for domestic supply and demand in the 2019-20 marketing year, which for soybeans will begin on Sept. 1.

The agency’s outlook maintains a very heavy U.S. soybean inventory though August 2020, but industry analysts think those numbers might still be too light. Upon picking apart USDA’s forecast, the skeptics may have a good case.

USDA placed 2019-20 U.S. ending stocks at 845 million bushels, above its long-term peg of 723 million published in November. The increase was primarily based on higher planting assumptions.

Analysts recently pegged next year’s ending stocks at 893 million bushels, though a handful of those projections exceeded 1 billion. Reuters collected these estimates last week, which were more likely analysts’ own forecasts rather than guesses of what USDA would say.

An 845 million-bushel carryout would be down from the current year’s expected 910 million, but nearly double 2017-18’s stocks, which at the time were an 11-year high.

The next time USDA will publish a forecast for 2019-20 ending stocks is May 10. Historically, the May peg can vary widely from that of February. In the past five years, the May number has varied from February’s by as little as 10 percent and as much as 30 percent.

USDA forecasted 2019-20 soybean crush at 2.105 billion bushels, surpassing this year’s 2.09 billion, and that number is tough to argue from a practicality standpoint given the huge volumes that have been processed over the past year. But the export figure requires more scrutiny.

USDA has slated 2.025 billion bushels in soybean exports for 2019-20, above its 1.875 billion-bushel forecast for the current year. That might be generous given that the projection assumes that China’s 25 percent tariff remains in place.

Should that tariff be removed before May, this forecast is likely to increase. In defense of its new export peg, USDA predicts global soybean demand to rise 6 million to 7 million tonnes next year and that Brazil’s exportable supply will shrink.

It is important to remember that Argentina, which has bought nearly 2 million tonnes or 73 million bushels of U.S. soybeans so far in 2018-19, is unlikely to return to the U.S. market next year as its crop will rebound from last year’s drought.

The United States shipped a record 2.166 billion bushels of soybeans in 2016-17, the same year that U.S. exports to China topped out at 1.33 billion bushels.

PRODUCTION QUESTIONS

USDA is more conservative on planted acres than the general market thinking. USDA pegged soybean plantings at 85 million acres, below the average industry estimate of 86.1 million.

The trend-line yield could also be considered cautious at 49.5 bushels per acre. Soybean traders have been getting used to the fact that with halfway decent weather across most areas, it is not difficult for the U.S. yield to surpass the 50-bushel mark.

The average trade guess for soybean yield is currently 50.9 bushels per acre, and when combined with 86.1 million planted acres, it would make for a 4.35 billion-bushel crop. With USDA’s production at 4.175 billion, the difference between the government and trade estimates could push the 2019-20 carryout past 1 billion bushels, even with the optimistic export forecast.

Last November, USDA originally penciled in 82.5 million acres for U.S. soybean plantings, likely based on lower profitability levels for soy relative to alternative crops. But lately, the futures market has not been sending signals to U.S. farmers to reduce soybean acres as far from last year’s 89.2 million.

On Wednesday, the ratio of CBOT November soybeans to December corn reached 2.41, its highest levels for the 2019 contracts since June 5. This ratio is often indicative of which crop U.S. farmers may prefer to plant in the spring.

Values around 2.4 favor neither, but soybeans are favored closer to 2.5. The ratio would need to be near or below 2.3 to distinctly favor corn.

The value of soybeans versus spring wheat has also risen on the board. New-crop soybeans are currently trading about $3.83 per bushel higher than new-crop Minneapolis wheat. This spread reached a high for the 2019 contracts on Monday, almost $1.33 above the August lows.

This would have the biggest implications for growers in North Dakota, the leading state in spring wheat and No. 4 in soybean plantings.

North Dakota farmers would also be more likely to gravitate toward beans if a U.S.-China deal is struck in the coming weeks, especially if it restored China’s imports. Typically, around 75 percent of the northern state’s soybeans heads to the Pacific Northwest where they are loaded on vessels bound for China.