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We began the 2008/2009 soybean growing season with record breaking price action. Soybeans made new record high prices early in the New Year to attract soybean acres. Flooding in the spring and early summer led soybeans to set new all-times ahead of the long Fourth of July weekend. In 2007 we saw a record drop in soybean acres brought about by the ethanol trade and high corn prices. That historic shift in acreage has taken a record carryout and reduced it by 70%. In the past year, we have seen the corn, wheat and soybean markets all trade to historic levels. The start to our current, dynamic bull market was fueled by ethanol, pun intended. The US has attempted to move from imported fossil fuels to domestically produced, renewable food fuels stocks.Food for FuelUS agriculture policy for years has ensured ample, low cost food stocks with exportable surpluses. Cheap corn and soybean prices meant lower cost for livestock and poultry producers and translated into cheap meat prices domestically. A bushel of soybeans produces a little more than 1.5 gallons of bio diesel. An acre of soybeans with a 42 bushel yield would produce roughly 65 gallons of bio diesel. The US consumes approximately 420 million gallons of oil per day. Bio fuels from soybeans will likely remain only a small part of our energy equation. The impact on the soybean balance sheet is likely to be greater.September 11, 2001 changed all this. Following the attacks on 9/11, our energy policy moved in the direction of renewable, domestically sourced, environmentally friendly bio fuels. This change in policy mandated ethanol and bio diesel usage. It is still open for debate whether this is good policy. The debate is over whether these policies have fundamentally changed the agricultural markets. The amount of tillable land in the US is shrinking at a rate of about 500,000 acres per year due to urban development. In the past, a poor corn crop would lead to higher corn prices. Higher corn prices would lead to a shift out of soybeans acres adding more corn acres to the rotation the next year. Additional acres would generally lead to excessive corn stocks which depressed prices. In the past decade, higher soybean prices would lead to acreage expansion in Brazil and Argentina. An increase in South American production would reduce US exports, building stocks and depressing prices.The move from food for food to food for fuel has changed these dynamics. Demand for feedstock to produce bio fuels has outpaced our ability to produce in accordance with demand.A large factor in the food for fuel trade has been the weak US Dollar. Low interest rates in the US have helped to weaken the Dollar. The US Dollar has become the currency of choice for the carry trade crowd. In a carry trade, traders borrow cheaply in US Dollars and lend in higher interest paying currencies, such as the Euro, British Pound or Australian Dollar.The Brazilian Real has been very strong versus the US Dollar. The Real is trading at its highest level versus the US Dollar since the currency was devalued in January 1999. The latest surge higher followed Standard and Poor’s upgrading of Brazilian sovereign debt to an investment grade. The Real has benefited from a strong Brazilian economy and better fiscal policy. Brazil is a country rich in natural resources. Petrobas has recently discovered what they believe will be 8 billion barrels of recoverable oil. With this find, Brazil is now number eight in the world in terms of oil reserves. Their currency has and should continue to benefit from the commodity boom. The US Dollar appears to have bottomed against the European and Asian currencies. The Real, however, may continue to strengthen against all the world’s currencies.The June acreage report released an acreage number that was a little below the trade expectations. A 74.533 million acre planting number exceeded the average trade guess by 233,000 acres. This increase is a record acreage shift of 10.902 million from the final 2007 number.Argentina is the world’s third largest exporter of soybeans. Tensions between government and labor are legendary. Like their neighbor Brazil, Argentina is subject to frequent labor strikes as a way to protest wages, conditions etc. In Argentina, the government enacted a 40% export tax on soybeans to curb domestic food inflation. This action has the effect of lowering domestic price by the 40% tax. For example, if world prices for export were $12 before the tax, beans delivered to a port in Argentina would be worth $12 to the farmer. After the tax, beans would be worth $8.57 to the farmer. The $8.57 price plus a 40% tax (.40*$8.57=$3.43) would equal the previous world price of $12.00.The current export tax has resulted in a farmer strike in Argentina. The strike was put on hold while a negotiator tried to work out an agreement. The language from both sides has been strong with no signs of either party willing to compromise. The government is concerned about political unrest in the face of rapidly rising food prices. The farmer is angered by the governments attempt to take the fruits of their labors. This strike will not have any effect on supply or demand in the long run. In the short run, it has forced world buyers to source their soybean from a more reliable source, the US. This has helped to further tighten old crop US stocks.
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