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(E-mailed to subscribers on August 27, 2010) SOYBEANS: MORE BEANS PLEASE? NO PROBLEM--The feature of the USDA's August crop report for soybeans is the estimate for U.S. production. With crops well developed and nearing harvest, this report is the first comprehensive look at yields. The report was chock full of other potential market moving revisions, however, which left the global balance sheet looking considerably different than it did one month ago.

The estimate for the average yield for the U.S. 2010-2011 crop was increased by 1.1 bushels per acre, or 2.6%, to 44 bushels per acre. Weather and disease factors were an issue, and the street was certainly not expecting an upside surprise. The average guesstimate for the crop was 3.357 billion bushels, which would have been 12 million bushels above the July estimate, but the actual figure was 88 million bushels higher, at 3.433 billion bushels. The highest guesstimate in this well-watched market was 3.41 billion bushels.

The market came into the report fresh after making nine-month highs. An unexpected upwards revision of that size would normally be worth a sharp selloff, but the market proceeded to test the highs set a week earlier (Chart 1).

November Soybeans

Despite the increase in the estimate for the U.S. crop, the demand picture tipped the scales to the bullish side. The USDA made significant revisions to consumption data.

The estimate for U.S. ending stocks for 2010-2011 was left unchanged from July, at 360 million bushels. But with upward revisions to consumption for both the current and new marketing year, inventory levels actually fell.

For 2009-2010, the estimate for the domestic crush and exports were raised by 5 million and 10 million bushels, respectively, dropping ending stocks to 160 million bushels, or 4.8% of usage. In the spring, that figure was 5.8%.

For 2010-2011, domestic consumption was increased by 8 million bushels, and exports were raised by 65 million bushels. The combination of revisions to both marketing years was equal to the pop in the estimate for Futures and options trading is speculative and involves risk of loss. Past trading results are not indicative of future profits the crop. But since consumption grew, stocks as a percentage of usage dropped from 11.36% to 11.1%.

At the global level, the effect of these revisions is that 2010-11 ending stocks will be 25.8% of consumption, down from July's estimate of 27.4%, and below last year's 26.8%.

Over the past six weeks there has been an explosive rush by foreign buyers to book U.S. new-crop soybean purchases--or at least it felt that way. Weekly new-crop commitments averaged 1.44 million tonnes during this period, well above normal weekly levels. Importing countries are always very active at this time of year, and while we're ahead of new-crop commitments at this time last year, the difference is not that extraordinary. Total new-crop sales stand at 14.7 million tonnes, compared with the year-ago tally of 14.094 million tonnes.

The initial bullish reaction to the August crop report fizzled, and in the following two weeks the market traded all the way down to pre-report levels. And that's because despite the improved demand outlook, we're still in a very well supplied market.

Unlike some other rallying commodity markets, the ending stock position has been replenished, and even after the bullish August crop report, there is no comparison to the inventory levels that created the bull market of two years ago. At the end of 2008-2009, global ending stocks stood at 19.9%, still dramatically below the current downwardly-revised level of 25.8%.

Even if exports continue to run at above historical norms, the U.S. crop is abundant and will supply the market until the South American crops are harvested next spring.

Soybean prices have risen to a point that stimulated production, and we do not see them trading substantially higher. The bull market in commodities has resumed, so we believe there is a danger in being short anything. Nevertheless, if there is a candidate for a short among commodities that have run with the pack and will soon become tired, this is it. Be certain to use a stop close above the high, basis the nearest contract.

Sholom Sanik

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