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Soybean futures to lift premium over corn

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Soybean seed sellers in South America are in for a bonanza.

Growers in Argentina and Brazil anyway tend to prefer the oilseed, rather than corn, the opposite of their US peers.

But the likely price moves following the US Department of Agriculture's latest crop revisions only look likely to deepen South American farmers' willingness to go with their default choice.

'Cry foul'

Sure, the USDA offered, in theory, price support to both corn and soybeans by, unexpectedly, cutting yield forecasts for domestic harvests of both crops this year.

But the downgrade to the corn figure - even though by a modest 1.1 bushels per acre to 154.4 bushels per acre, smaller than the soybean cut by 1.9 bushels per acre to 42.6 bushels per acre – looks far less convincing.

While commentators wrong-footed by USDA data revisions often cry "foul", as many are over the corn figure, this time they may have a point.

The USDA methodology includes using a five-year average figure for corn ear weights, which includes three years of disappointing harvests, including last year's once-in-a-generation mishap, thanks to drought.

It looks very possible that Monday's yield figure represents a low-water mark – meaning that Monday's revival in corn prices was but temporary relief.

Frost threat

The case for sitting on soybean prices is not, yet, nearly so strong.

Sure, the USDA used the same methodology in calculating its soybean yield, in using five-year average data on pods.

But that does not contain such a strong skew factor. Soybeans' later growing cycle meant last year's yield was not nearly such a disaster, meaning the crop was able to stage a recovery following late August rains.

This later development cycle also leaves Midwest soybeans far more vulnerable to damage from an early frost this autumn, meaning investors are happier to leave a significant risk premium into prices for now.

Elevated ratio

This looks to spell further outperformance of soybean futures against corn.

While the ratio of November soybeans to December corn is already unusually strong, at 2.72 on Tuesday, history provides a guide but not a straitjacket.

Last year, for instance, showed how wheat's premium over corn, (which has now returned to the tune of nearly $2 a bushel) was capable of being reversed.

And one impact of outperforming soybean prices will be to encourage South American growersm now considering the sowing of crops to be harvested early in 2014, to plant the oilseed en masse.

Big crop prospects

Whether South America actually does produce a bumper crop will, of course, depend largely on the weather.

But current forecasts are for another southern hemisphere summer without a swing to La Nina or El Nina conditions.

Agrural's estimate of an 89.1m-tonne Brazil soybean crop currently looks a better bet than the 80m-82m tonnes forecast by industry group Abiove. (The USDA has an 85.0m-tonne figure.)

Soybeans' outperformance over corn should, as market theory suggests, sow the seeds of its own demise.


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