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June 16, 2023
Soybean Outlook Update Following USDA’s June WASDE Report
Soybean futures volatility increased sharply this week as futures prices responded to concerns about dry weather possibly impacting crop yields. Purdue ag economists James Mintert and Nathanael Thompson discussed the updated soybean outlook on the latest Purdue Commercial AgCast video podcast. The Center’s team reviewed this week’s soybean crop condition ratings and possible implications for 2023 U.S. soybean yield, production and carryover stocks. Shifting demand prospects for soybeans related to the increased usage of soybean oil for renewable fuels and trade prospects were also featured including a comparison of U.S. exports to those emanating from competing South American exporters. The discussion concluded with an overview of soybean basis, including a discussion of soybean processor and Ohio river basis, using the recently revamped Purdue Crop Basis Tool.
Companion slides and the audio transcript can be found below.
James Mintert: We’re going to talk a little bit about the soybean outlook in light of the fact that last week USDA released updated supply demand estimates, and that there’s been a lot of movement with respect to soybean futures and a lot of it’s centered on crop conditions here in the U.S.
Welcome to Purdue Commercial AgCast, the Purdue Center for Commercial Agriculture’s podcast featuring farm management news and information. I’m Jim Mintert, director of the Purdue Center for Commercial Agriculture, and joining me today is Dr. Nathan Thompson, who’s an associate professor of ag economics.
The easy way to put it is the soybean crop is really not off to a great start. As of June 13th, 51% of the U.S. Soybean crop and 57% of the US corn crop was in the D1 to D4 drought category. If you look at the condition indexes that came out earlier this week, I think they came out Monday afternoon. So these are conditions as of Sunday.
Good to excellent ratings declined really throughout the corn belt and really almost all the key growing regions. I think we had a couple of states that saw some improvements. Arkansas was a little bit better. I think Louisiana held steady. Kansas was up slightly, but you look at the rest of the states, Nathan, and pretty much everybody was down. And so I think that’s really what the focus is on right now.
Nathanael Thompson: When you look at kind of what’s going on in the futures markets today and this week, it is just the response to weather and also just the short term forecast. Really continuing to stay dry in a lot of these states where we’re already seeing deteriorating conditions.
James Mintert: Yeah, so if you look at it from an average standpoint, we’ve got a larger percentage than normal of the crop that’s in the drought category. The good to excellent ratios are somewhat low. As somebody pointed out to me in an email recently at this stage of the season, it’s hard to get real excited about those good to excellent ratios, but nevertheless, it’s the fact that maybe we’re trending in the wrong direction.
And then the forecast for future weather keeps suggesting that a continuation of dry conditions. It really seemed to hit home today with the futures up sharply as we’re getting ready to record here. We didn’t actually capture the close, but I think November futures was up about 50 cents.
Nathanael Thompson: Yep.
James Mintert: That’s the biggest move we’ve had in a long time in November futures.
[00:02:12] Review of WASDE & Soybean Outlook
James Mintert: Let’s talk a little bit about the information that USDA revealed and then we’ll kind of wrap this up with some discussion of the basis and what’s taken place there and maybe some basis forecast.
If you look at USDA’s information, they didn’t do anything with respect to yield. They’re still sticking with their trend yield estimate of 52 bushels per acre, despite the fact that we’ve got some concerns about weather. That’s normal for them. They normally wouldn’t change their yield estimate until they actually get some survey data. There is a chance that they change it in July, particularly if we continue to see a deterioration of conditions. But otherwise, they’re likely to stick with that. Their estimate for the trend yield is 52 bushels per acre. Using a slightly different timeframe, I came up with a slightly lower trend yield. But the real point there is those trend yields are very heavily dependent on just exactly which years you choose to estimate the trend.
They give you a starting point with where yields might go and really just reflect the fact that from a technology standpoint, yields on average tend to go up year by year. So that’s the real point of the trend yields. But they don’t incorporate any information about current crop conditions.
The question mark, this time of year is always, How quickly do you wanna start adjusting from trend to reflect what’s taken place so far with respect to planning conditions, weather conditions after planning, and some extent weather forecast.
If you look at roughly the last 10 years or so. You know, the key point there is we’ve seen significant variations from trend, and we saw this in our other podcast when we talked about corn. But you know, it wouldn’t take much to cause that trend yield or the actual yield to fall below the trend. If you look at last year we were at 49.5. It’s entirely possible we could see yields drop back to that.
We’ve seen some other years. ’19 of course, was well below trend. That was a different situation because that was based on late planting.
Nathanael Thompson: Right.
James Mintert: But nevertheless, you know, we’ve had yields above trend. We’ve had yields below trend, so it’s pretty early to deviate too much from that. But clearly the market is, is expressing some concern about that, right?
Nathanael Thompson: I mean, at this point, yeah.
James Mintert: USDA is gonna come up with their planted acres estimates on June 30th. So we’re still running with the prospective plannings estimates that were released at the end of March, and that was 87.5 million acres and.
Again, a little bit like with corn, I don’t see too much reason for expectations for any significant deviation from that. It’ll be a little bit different. It never comes out exactly the same. But no expectations about actually people pulling back or increasing above that as far as I’ve been able to pick up. How about you, Nathan?
Nathanael Thompson: Same, right. Year to year it varies depending on the conditions. This year, you know, a lot of the focus is on weather not so much a lot of focus or a lot of discussion on having big swings from those expectations.
James Mintert: Yeah. There just really weren’t any serious planting problems.
Nathanael Thompson: Right.
James Mintert: On a widespread basis. There was some concerns about cold weather earlier, but that didn’t really impede planting progress too much. If you look at those numbers, and if you take that trend yield, multiply that through by the acreage of 87.5 million acres, you come up with record large soybean production of 4.5 billion bushels.
But again, that’s heavily dependent on the acreage and it’s heavily dependent on hitting that trend yield. And just as an example, if we pulled back the trend yield. Back to 2022’s level, that’d pull production back to where we were last year, which was about 4.28 billion bushels. So that’s a big move.
And so there’s a lot riding on what takes place with respect to weather. Now, with soybeans a little bit different than corn. The weather concerns are a little farther into the future. You worry more about soybean weather in July and especially as you get into August. But the market got excited today. That’s for sure.
Nathanael Thompson: Yeah. Corn and beans were both up. Right. And so sometimes they follow each other there. But yeah, definitely. Again, just a lot of movement today and I think some of that was just kind of on continued dryness and the short term forecast really being a big driver of that.
James Mintert: A lot of focus on whether or not the various weather models are in agreement with each other. When you see all three of the major models come together, that’s when people kind of get excited. We’ve had a lot of disagreement among the models with respect to dryness and how long the dryness would continue. So that continues to be a focus. But I think some of the revisions earlier today suggested that maybe all three of those models were focusing on some more dryness.
If you look at the ending stocks estimates, and that’s always where we try and drive the balance sheet. Look at the change in ending stocks projected at the end of the marketing year. USDA’s estimates would suggest that we would see ending stocks increase from about 230 million bushels for the ’22 crop year to about 350 million bushels for the ’23 crop year. The last time we saw ending stocks close to that level or exceed that level was back in the ’19 crop year. And that was really coming off the big carryover in ’18, which was a function of the trade war with China.
We actually recovered from that more quickly than a lot of us expected. But still, if you go back to the ’19 crop year, we had a carryover estimate going into the 2020 crop year of 524 million bushels. It’s really been quite a while since we’ve actually had an estimate in the ballpark of that 350.
I think in 2016 we were at 300, and then we had an extended period from ’07 to about ’14 or ’15 where we were in the vicinity of 200 million or less. So the 350, if it materializes, is a big difference compared to the last three years. You know, 2020 crop year we carried over 256 million bushels into the 2021 crop year. ’21 crop year, we carried 274 into the ’22 and so on. So that, that was the concern up until really the end of May. And now all of a sudden here as we enter this first half of June, the focus has kind of shifted gears with people thinking that maybe we’re not going to see that kind of production and maybe not see that kind of carryover.
So the ending stocks estimate for USDA for the ’23 crop year, 8% of usage. That’s up from a 5% estimate for the ’22 crop. And if you go back to the prior two years, we were basically sitting at 6%. People that have been following this on an ongoing basis know there were some times last summer when we thought there was a chance we’d see carry over down below 4%.
So that when you think about it from that standpoint that 8% carryover is kind of a big shock, but again, heavily dependent on what takes place with respect to production here in the us. A lot of that coming from yield uncertainty. And then as you think about the ending stocks, there’s also some concerns about what’s taken place in South America, particularly Argentina.
We’ll talk more about the South American situation here in a minute, but still that situation maybe isn’t fully resolved in terms of how large that crop is.
[00:08:51] Renewable Diesel Production
James Mintert: The wild card, other than the weather, and I have to make that caveat, the wild card and the outlook, at least on the demand side. It is really what’s going on with respect to renewable diesel.
And we’re looking at a chart here of the renewable diesel production capacity published by the energy information administration here earlier this year. So this isn’t brand new information. This is information that they actually released in February, but if you haven’t seen it, it’s pretty interesting with respect to the expectation of additional capacity coming online.
And we have been ramping that up. The last several years, it was relatively flat until about the 2021 crop year. And then the last several years it’s been ramping up. And as you look at it, the announcements for additional plan capacity are quite large, but a little bit like we saw with ethanol going back roughly 15 years or so, we kind of know that not all of that additional plan capacity is going to hit, but it’s still some pretty big numbers.
I mean, if you look at it potentially more than doubling capacity in just the next couple of years. Right?
Nathanael Thompson: Yeah. There’s certainly planned additional capacity, large increases, which are kind of hovering over the dynamics in terms of supply and demand here within the United States.
But like you mentioned, planned additional capacity is not additional capacity. That’s actually come to fruition.
James Mintert: So, yeah. And we saw that with ethanol going back into the the odd years. Right. There were some huge announcements that just didn’t materialize. Yeah. And I suspect that’ll happen here as well.
And I think there’s been at least one plant here recently that that was maybe announcing a pullback. But if you look at the numbers, it’s still a, even kind of discounting a little of that additional capacity. It’s still a lot. And you know, if this chart’s expressed in thousand barrels per day.
And so just looking at the numbers. In 2022 actual capacity was about roughly 160 or 170,000 barrels per day. The projection for 2023 was a little over 250,000 barrels a day. The projection for 2024, a little over 350,000 barrels a day and the projection for 2025 in the ballpark of about 375 or 380,000 barrels per day.
So those are some big changes, and even if you back on off of that you know, we’re still likely to see a pretty big change there. The other way of looking at this is just look at the soybean oil balance sheet. And look at the percentage of soybean oil that’s going into the industrial usage category and this chart’s kind of a shocker when you look at it. You go back roughly 20 years the percentage of soybean oil going into the industrial usage category, which is essentially zero. Yeah. It started to pick up a little bit, starting at about 2005 as we got more of an emphasis on renewable fuels in general.
But in recent years, 2020 crop year was 36%, ’21 crop year, 40%. ‘ 22 estimated so far is at 44%, and then a projection for the ’23 crop year at 46%. Those are huge changes. And I think it just points to the idea that one of the big growth areas for soybeans in the future is going to be this increase in demand for soybean oil.
And that kind of makes forecasting what’s taken place on the whole usage side a little more challenging because we’ve historically been using soybean meal as the primary demand for soybeans, not soybean oil. And this kind of flip flops the situation a little bit, doesn’t it?
Nathanael Thompson: Yeah, it really does. As we look forward and think about future expansion. Some of this is going to have to settle down before we really figure out which of those two sources is going to drive this.
James Mintert: It’s a little bit like what we saw with ethanol 15 years ago, right?
Nathanael Thompson: Yeah.
James Mintert: As we were creating that new demand for corn and trying to figure out how the byproducts were gonna play.
Now we’re maybe evolving into a situation. We’re not there yet, but we’re evolving into a situation where soybean meal could be the byproduct.
Nathanael Thompson: Mm-hmm.
James Mintert: That’s, that changes things quite a bit. So.
[00:12:48] Soybean Exports
James Mintert: Let’s talk just a little bit about the export situation. And, you know, we’re looking at a chart here that compares U.S. exports a bushel basis, billion bushel basis to major competitors.
And of course, those major competitors are all in South America. So it’s Argentina, Brazil, and Paraguay. And if you look at particularly the last several years, you can just see that our exports have been going the wrong way. They’ve been weakening while South American exports have been rising.
I think most recent estimate from USDA for the ’23 crop year is that exports from those South American countries would total just under 4 billion bushels. Whereas the forecast for U.S. exports is just under 2 billion bushels. You go back in time and the crossover point, I think is in about 2000 or 2001.
Until that time, U.S. was a larger exporter than South America. And over the last 20 years things have really changed. And a lot of that change has really just been in the last 10 or 11 years.
Nathanael Thompson: Yeah.
James Mintert: Again, looking at the chart, you can see the divergence really start to hit probably in that drought year of 2012.
Nathanael Thompson: Mm-hmm.
James Mintert: And then going forward South America has just really exploded in terms of their growth and production and then correspondingly their growth in in exports. If you look at the ending stocks in those competing exporters USDA is forecasting no big surprise here, an increase in the ending stocks in those competing exporters based on large expectations for production down there.
The ’22 crop, 14% carryover in Brazil, Argentina, and Paraguay. USDA’s projecting a 17% carryover. But as I mentioned before, there’s some lingering concerns over the size, especially the Argentine crop. A number of the South American forecasters have actually pulled back their estimates the size of the Argentine crop and are actually quite a bit below what USDA’s forecasting coming out of there.
That’ll get resolved over the course of the summer, but I think that could be another factor that maybe has helped fuel a little bit of the rally. I think most of the rally that we’ve seen as beans is related to weather, but I think a little of it could be the fact that maybe that South American crop isn’t quite as big as what we’ve been expecting or thinking. And most of that is focused on, on Argentina, not Brazil.
If you look at USDA’s projection for the national average cash price for the marketing year down over $2 a bushel compared to last year. The ’22 crop average, they got pegged at 14.20. That’s not gonna change much, given how far we are in, into the marketing year.
Their forecast for the ’23 crop year is $12 and 10 cents. And Again, you know, the big rally maybe could change that a little bit, but we’ll see how that plays out. But that’s largely based on that increase in the carryover and have expectations for soft exports. Looking at a chart of November Soybean futures, you know, we bottom ’em out on May 31st at least so far.
And since then we’re up about a $1.60. So we’re recording this on the 15th. And this is a chart that we pulled off roughly 20 minutes or maybe 30 minutes before the close today. But when we were looking at the soybeans, November soybeans were up, I think about 51 cents.
Nathanael Thompson: About 51 cents. Yeah.
James Mintert: So it was at 12.91. Again, like we discussed on the corn chart neither one of us are really big on technical formations.
Nathanael Thompson: Mm-hmm.
James Mintert: But if you look at the chart and start thinking about where there might be some resistance, you know, you just look for areas of congestion on the chart. And the first one that, that I see is in that roughly 13.20 to 13.30 range.
Nathanael Thompson: Yep.
James Mintert: And then after that, you could probably debate but it’s probably in the ballpark of $14 might be another target. I suspect it’s gonna take some significant dry weather before to push those kind of numbers. Right?
Nathanael Thompson: I would agree. Yeah. It’s certainly possible, and again, with the forecast the way it is currently, like it’s not out of the realm of possibilities, but we’re going to have to see continued dryness and continued forecasts that aren’t gonna include rain for us to get there.
[00:16:50] Purdue Crop Basis Tool
James Mintert: So you’ve been updating the basis tool and updating the estimates. Again, maybe just a little bit of a reminder of the fact that the basis tool is really a lot more flexible than it was cause of the revamp that you published here, roughly a month or so ago.
Nathanael Thompson: Mm-hmm. So, just briefly, we’ve covered this on, on some of our other outlets, but yeah, we redid the basis tool.
There’s several new features that are hopefully useful and different ways to look at some things that we frequently talk about, but maybe weren’t available to the users of the basis tool until now. You know, some of those being obviously now the ability to look at soybean processor basis specifically, which we’ll talk about here in just a minute. And then also some flexibility, you know, different locations. We’ve included Iowa. As part of the regional basis tools and, you know, some of the same features in terms of all the historical data and, and being able to look at various nearby and, and deferred contract months.
To start out maybe just as a little bit of a baseline in terms of our discussion of basis, I pulled out just
Central Indiana soybean basis relative to July futures. What you can see here is again, going back to the fall, obviously big deviation from normal, and a lot of that had to do with what was going on with Mississippi River levels and the inability to ship soybeans or not inability, but you know, made it more difficult and more expensive to ship soybeans through those export markets on the river.
We talked about this previously with corn. You know, we saw a similar kind of impact there. Soybeans probably felt it a little bit harder given the larger reliance on export markets with soybeans. But the similar to corn, you know, that big deviation really corrected fairly quickly. It did definitely by the end of the year, probably by the beginning of December, we saw basis values really back into what I would call normal, like in line with the historical two year average, which is what I would kind of start with for soybeans. And so from there, right, basically December onward, we’ve really seen basis levels pretty much following along that historical trend in terms of the most recent two years, the pattern that we would expect a basis to follow.
And again, that has continued up until really current time. So you can see, you know, where we’re at this week basis is maybe 10 cents lower than that two year historical average. But it’s really right in line with where I expect basis to be in the next couple of weeks as we look toward that July ’23 soybean futures contract going off the board.
So we really haven’t seen a lot of deviation from that average and not really a lot of information to think that that’s gonna change going forward at this point.
James Mintert: You know, sometimes when you see big rallies like we’re seeing this week…
Nathanael Thompson: Mm-hmm.
James Mintert: With respect to futures, sometimes you see cash prices not follow that as closely and that could lead to what maybe a little widening of the basis. Right?
Nathanael Thompson: It very well could, and again, we won’t pick that up until next week and it’ll depend on, you know, how future’s open tomorrow. Cause again, sometimes we see these big rallies and we could pull back tomorrow depending on kind of how the market reacts. So yeah, it’ll be interesting to see where we’re at next week in terms of a big swing, one way or the other.
Because again, looking at it relative to that July contract is helpful for maybe a historical perspective, but if you’re wanting to kind of forecast going forward, we’ve only got a couple weeks left on that chart from the July contract.
So it doesn’t really give you a good idea of maybe what the expectation is here through the remainder of the summer. And so that’s why I wanted to look at it also relative to the September ’23 soybean futures contract. Basically the same story, week basis in the fall really corrected pretty quickly and has followed right along that historical average. But what the expectation would be, at least, you know, based on normal weather, would be we would see basis steadily weakened as we move towards the beginning of the ’23 crop marketing year, which technically starts, you know, the first week of September of this year. So that’s kind of the typical pattern, weakening of basis as we move towards harvest, more crop will be available. But kind of to your point, right? As we see some of these rallies. As we see weather conditions weighing heavily on markets. We are in the time of year, right? These summer months where basis can be very volatile and very hard to predict. And so while this ‘is probably our best guess as of today, right?
The rallies that we’ve seen in futures markets are markets are today are going to impact cash markets, right? Will cash prices keep up with, with those rallies. In addition to, right if continued dry weather is, is hovering over the market to the point where we start to think that the ’23 crop will be smaller than expected, that will also start to weigh heavily on basis values as people who need corn are going to start having to bid up to get that corn today, given we know we’re gonna need it going forward. And so all of those things, all of those dynamics come into play as we think about what’s gonna happen here over the remainder of the summer.
So then again another kind of new component of the basis tool that I didn’t mention earlier. You can look at soybean processor, but you can also look at what I call kind of Ohio River basis for soybeans and corn.
Here we’re looking at soybeans and, and all that is, is an average. Of terminals that are on the Ohio River in southern Ohio, southern Indiana, and southern Illinois. And again, you know, that’s just kind of a proxy of what’s going on in export markets. We used to just use the southern regions of the various states to do that. This is really drilling down on that because again, the crop reporting districts that dictate the regional averages include a lot more than just those river markets specifically. They’re obviously very heavily influenced by that, but to really drill down on that, I think is a, is a useful way to think about that.
So again, these are just terminals that are on the river. Again, I do average them all together across the three states just for simplicity. But again, what, what you see is exactly what I’m saying is again, going back to the fall, we saw a weak basis, but that’s really exacerbated by looking at those river markets, those river terminals specifically. Very, very weak basis for soybeans in the fall of 2022.
But again, same story, self-corrected really got back to a pretty normal range of basis values by the beginning of December. And very similarly has tracked along that historical two year average for basis in those locations the last couple years. As we look at kind of going forward, weakening as we move towards harvest of ’23, but again, with the caveat being that obviously as weather conditions continue to unfold, basis can get very volatile as we think about what’s gonna happen even at those export markets. Given the supply demand tradeoff there.
James Mintert: So you’ve also taken a look at processor basis, which to me is really interesting becuase that gives us some access to what’s going on in the interior markets.
Nathanael Thompson: Exactly. So again, this is similar to say looking at ethanol plant bases for corn. I’m just taking all of the soybean processors that I have access to and averaging those together at a state level. Here we’re looking at Indiana, but again, if you go to the tool and are in a different state, you can see the same thing for Illinois, Iowa, Ohio, and Michigan.
And again, right? Same story unfolds weak basis in the fall. And again, that had to do with, you know, these processors not really needing to bid up basis given the, the lack of of ability to move corn down the river. Again, correcting, getting right back in line with the, the historical average. And again, following through the majority of the crop marketing year, we’ve been right in line with that historical pattern and starting to kind of dip off and weaken as we approach the expiration of July contract.
If you looked at the September chart, it would show you the, kind of the same trend. That the expectation is we expect to see basis kind of slowly and gradually weaken as we move towards harvest of ’23. With the same caveat, right? These processors would be a great example of like similar to ethanol plants, right?
They need soybeans no matter what happens with weather here over the next several months. And so if we do get into a situation where we’re expecting the ’23 crop to be short or to have some production issues, these would be the locations you’d be looking to really start getting wild on basis bids to secure soybeans.
James Mintert: So one thing Nathan, as I look at the charts and looking at not just the soybean processor, but also looking at the river basis…
Nathanael Thompson: Mm-hmm.
James Mintert: Looking at the interior central Indiana chart. You know, the one thing that really jumps out at me is the two year average. The two year average for the prior two years, did a remarkably good job of forecasting what the basis is going to do with the only caveat being what took place last fall
Nathanael Thompson: Yep.
James Mintert: When the river markets essentially shut down.
Nathanael Thompson: Mm-hmm.
James Mintert: And basically the market was screaming at you to find some place to store soybeans. Don’t try and market them until we get this river situation sorted out.
Nathanael Thompson: Yep.
James Mintert: Once we got past that you know, on a week to week basis, or sometimes above, sometimes below, but that pattern really followed that two year average very closely.
Nathanael Thompson: Yeah, it’s pretty remarkable. We did research several years ago kind of trying to identify some thumb rules that people could use when using the tool and for corn we have stuck to that a three year historical average, technically, statistically being the best kind of predictor of that. For soybeans, we have stuck with what the research told us, which was a two year. Basically relying on those more recent years. And again, yeah, it’s pretty remarkable cause again, you know, a lot of people would say, well, we’re gonna use a five year historical average and you could go in and do that here. And the, the pattern would be the same, but the levels would be different because, you know, over the last five years, a lot of things have happened.
It is really interesting for me. Sometimes it’s surprising to me how similar those patterns can be.
James Mintert: Sometimes a simple model works pretty well.
Nathanael Thompson: It really does. That’s right.
[00:26:03] New Crop Opportunities
James Mintert: So you’ve taken a look at some new crop pricing opportunities, and you did this, I think this morning, so future’s actually adjusted after you looked at this, right?
Nathanael Thompson: Yep. So I think just to give perspective, I’m gonna start with a futures price of 12.63. I think at that point themarket was probably up 20 cents.
We said it’s up 50 for the day. So we’re gonna add about 30 cents to what I’m using here to get us where, approximately where the market’s going to close. And so we often talk about these new crop kind of marketing opportunities, looking at where futures are currently and our expectation for basis for the fall.
And then kind of another kind of pitch here for the new version of the crop basis tool is it allows us to look at this a little more concretely. You know, you always could do this with the information that was in the old tool, but it’s a little more back of the envelope calculations. But, now I’m really excited that I can show you a chart and show you exactly where I’m getting this number.
So, again, if you wanted to replicate this for yourself in a particular location or for particular situation, you could. And the way that you do that is, again, for soybeans, the chart is going to default to the most recent two years, not including the current year, right? So, for example, for soybeans, it right now would be the 20 21-2022 and then 2020-2021 crop years, those two years where you get your historical average. But if you’re looking forward kind of to the coming crop marketing year like we are now, you’d need to get rid of that 2020-2021, and add in 2022-20 23, which is the current crop marketing year that we’re kind of getting towards the end of.
And so that’s gonna give you basically your expectation for basis starting next fall. And so when you do that and you look at it again, I’m just going to start with
Central Indiana as an example. You know, looking at fall delivery in that October timeframe, you’re looking at basis probably based on the most recent two years, 40 cents under November soybean futures.
So again, if you look at 12.63 as your futures price adjust for a 40 cent under basis, that would put you at 12.23 on a cash price. For fall delivery again, I’m gonna add 30 cents to that cause the market has rallied at least.
James Mintert: Yeah, it’s almost exactly. So you’d be up in that, what, 12.50 and 12.53 range.
Nathanael Thompson: Up in the approximately 12.50, a little bit over 12.50 range. Now again, I think it’s always useful to compare, Michael sent his updated breakeven prices for soybeans for the ’23 crop. He’s got average productivity soil soybean break even for the ’23 crop closer to $13. So again, that 12.50 that we’re kind of getting to based on some of our adjustments here is quite a bit below his projected breakeven. His breakeven on high productivity ground, I think was closer to 12, so you’d probably be above a break even there when we’re up at this 12.50 cash price.
So again, you gotta really think about kind of where is your cost of production and think about what the market is currently giving us, because that really has a lot of implications for how you’re going to manage risk as we move into that ‘ 23 crop.
So then the other way to look at this, you could use some sort of regional basis expectation to build that cash price. But, right, now that we can kind of look at this for an ethanol plan or a soybean processor, even for a river market. Well, what if I wanna look at, you know, I, I sell to those locations. What could I be looking at in terms of a basis this fall? So, again, I’m gonna use the same 12.63 futures price. I’m going to do a slightly different, I’m gonna go into the basis tool.
I’m gonna say, okay, I’m not gonna look at the regional basis values. I’m gonna go look at soybean processor basis values. I’m gonna do the same adjustment where I’m not looking at, you know, the most recent two years, excluding 2022-2023, but I’m going to adjust that. So I look at 2022-2023 and 2021-2022 as my two year average for next fall.
And when you do that, there’s quite a bit of difference in what you see in quote unquote regional basis average, meaning, you know, All of the, the locations within a crop reporting district, as opposed to if you look at, specifically at those end users, at those soybean processors, you get a expectation of basis that’s probably closer to 15 cents under November ’23 soybean futures to deliver this fall.
So when you do that, again, 12.63, adjust for a 15 cent under basis, that puts you closer to 12.50 or so. Again, we got to adjust cause future prices have rallied 30 cents since I made the slides here. So that puts us up closer to 12.80 on a cash price for fall delivery. That’s getting a lot closer to where Michael is on his breakeven for average productivity soil in that $13 range, and again, well above his breakeven on on high productivity soil.
And so again the rallies we’ve seen today and even the strength in the market we’ve seen really going back about a week or two. Has really started to chip back at maybe what we had lost in in recent months. Now we’re still under, you know, those breakevens specifically with these examples, but I think what it shows you is we don’t think about basis a lot, but you know, that 40 cent under versus that 15 cent under difference between your run of the mill elevator versus an end user, or somebody who’s going to have a little stronger basis bid, can make a big difference on what you’re going to get in terms of cash price.
James Mintert: Yeah, very much so. So let me back up for a second. We just kind of bragged on the fact that the two year average did a great job of forecasting what was going on in the current marketing year, with the exception being what happened last fall. So then I’m thinking when you did the forecast you used last fall as part of your two year average.
Nathanael Thompson: Mm-hmm.
James Mintert: Did that, I’m thinking that that biased your basis forecast down.
Nathanael Thompson: It certainly is gonna drag it down. That’s absolutely what’s gonna happen.
James Mintert: So I’m wondering, and listeners could do this on their own. I think I’ll probably do it when I go back upstairs and sit down at my computer. I’m wondering about using the two prior years and leaving that 2022 crop year off because I’m not currently forecasting that we see the river levels collapse like they did last year. Does that sound like a good idea?
Nathanael Thompson: Certainly. I don’t know off the top of my head what the difference would be. It would certainly give you a stronger expectation for what basis would be next fall. Some of it would depend on, you know, we started out the year with really strong basis last fall.
The first couple weeks of the crop marketing year basis was actually on unusually strong before it got unusually weak, which was kind of what made some of that really interesting. So it would depend on kind of where on that chart you’re gonna look at that, but, It would certainly improve the expectation. I don’t know how, by how much off the top of my head, but that would be an interesting exercise.
James Mintert: It’d be an easy thing to do with the tool. So I for listeners, you might want to take a look at that and who knows what’s gonna happen this fall with respect to river levels. We could see a repeat of last year, but that would be a little unusual to see that happening in two years in a row.
But who knows? But that’s one of the cool things about the tool. It’s pretty easy to make that kind of an adjustment.
Nathanael Thompson: Yep.
James Mintert: And say, well, what happens if we see 2023 fall look more like those prior two years.
Nathanael Thompson: Yep.
James Mintert: And drop out the ’22 crop year. So, all right, cool.
[00:32:47] Futures Price Distribution & Breakevens
James Mintert: So you also took a look at the price distribution tool that the University of Illinois publishes with the Farmdoc team.
Nathanael Thompson: This is just giving you some perspective on the potential futures price risk of those new crop November ’23 soybean futures that are a part of that calculation that we’re doing to kind of get to those expected cash prices for fall delivery. And again, I pulled this off this morning before markets were already up, but they’ve been up even more since then.
So you kind of have to adjust a little bit. The numbers there, but I think that the distribution would be largely the same. And, and the point being that you really want to look at, okay, well where are we currently? And then the way this model works is based on current futures prices and option values. It’s kind of incorporating the potential volatility that we’re seeing in the market into, to looking at, well, what are the range of prices that we could see? That November ’23 soybean futures contract go off the board at. What I think is useful is to at some points on the distribution to kind of give you some numbers to work with as maybe far as some sensitivity analysis to your budget.
So, for example, you know, where it was this morning, there was a 25% chance of seeing that November ’23 soybean futures contract go off the board for less than $11 and 32 cents. That’d be a little bit stronger now. So again, maybe add 30 cents to that. So 25% chance of a price less than $11.60. Which again that’s a non negligible chance of a price that is significantly lower than where most people are going to be on a cost of production given kind of the increase in input prices that we’ve seen in recent years.
On the other hand, right? You got a 75% chance of being above 13.58. If I adjust that again for the rally we’ve seen this afternoon, that puts us up 13.90. 75% chance of being above 13.90. The one thing I want to point out here is in addition to just thinking about, you know, that midpoint and those, that 25th percentile and 75th percentile being kind of good gauges for some different price scenarios to do some sensitivity analysis is looking at how symmetrical are those points on the distribution?
And again, they’re not way off here. But I always kind of try to look at not only the range, but how close to being symmetrical are they. This is a model, so this could have changed with the rally. I don’t know exactly, I haven’t looked at it this afternoon, but we see a little more downside risk here than we see upside potential based on the way this distribution is characterized, right?
So basically we’ve got, you know, 25% chance that price is going to drop by
James Mintert: $1.08. And then actually you’ve got a little wider spread going on the upside you’re a $1.18 on the upside.
But to me, the interesting thing, and again, I think for listeners, we have a link to this tool on our website. So if you’re at the Center for Commercial Agriculture’s website under the tools menu, we have the Illinois price distribution tool. Again, it’s going to be fascinating to see how this shakes out with the big rally, right?
Nathanael Thompson: Yeah.
James Mintert: Because I, the two things that I’d be looking at, one is what’s that spread between the 25% and the 75%?
Nathanael Thompson: Yep.
James Mintert: My guess is it’s widened.
Nathanael Thompson: Yes.
James Mintert: Relative to what you were looking at. My guess is that’s widened. And again, this symmetry would be interesting to see which side the market is maybe favoring a little bit.
Nathanael Thompson: Exactly. Yeah.
James Mintert: Yeah. So. Lot of volatility and what’s taken place with the rally today and really this week and actually the last two weeks is just going to point to more volatility.
With that, I think we’re gonna wrap up this edition of the Purdue Commercial AgCast podcast. Just a reminder, if you’re listening to this on your podcast provider, this is available as a video as well. And of course you can always download the slides that we were using as we were discussing the outlook. We’ll be paying close attention to the soybean and the corn outlook here over the course of the summer. So we’ll have more podcasts focused on what’s taken place from an outlook perspective.
On behalf of the Purdue Center for Commercial Agriculture and my colleague Dr. Nathan Thompson, thanks for listening. I’m Jim Mintert.
December 13, 2023
The 2023 Ag Tax Webinar, part of the Purdue Income Tax School, will provide in-depth coverage of selected agricultural and farm income tax issues to supplement material provided at the two-day in-person or virtual tax schools. The 2023 webinar will be taught by Guido Van Der Hoeven, an expert on agricultural tax issues and one of the authors of the 2023 Agricultural Tax Issues book, on Monday, December 13, 2023, starting at 9:00 am ET.Read More
January 5, 2024
A management programs geared specifically for farmers. Surrounded by farm management, farm policy, agricultural finance and marketing experts, and a group of your peers, the conference will stimulate your thinking about agriculture’s future and how you can position your farm to be successful in the years ahead.Read More