Soybeans, used to make products from livestock feed to tofu and biscuits, will get costlier because lower harvests from South America are depleting inventories.
The oilseed is already trading close to levels last seen four years ago and some fear prices may again challenge record highs witnessed during the 2007-08 food crisis. That, in turn, may contribute to higher food inflation, a factor that led to last year's uprisings in North Africa and the Middle East.
Societe Generale raised its forecasts for benchmark soybean prices and warned global stockpiles were nearing "critical levels," in a report published on Wednesday.
The French bank now expects soybean futures in Chicago to average $14.00 a bushel in 2012, up from the previous estimate of $12.50.
"Adverse weather has severely affected soybean production in South America, and particularly in Argentina," wrote the report's author Christopher Narayanan, the head of agricultural commodities research at Societe Generale. The bank forecasts 2012/13 U.S. end-stocks at 150 million bushels, or 4.6 percent stocks-to use ratio, down from 5.3 percent in the prior season.
May soybean futures topped $15.00 a bushel on the Chicago Board of Trade at the close on Monday, close to a four-year peak, on reports of sustained demand by China, the world's largest buyer of the oilseed. Soybeans hit a record high of $16.63 in the summer of 2008.
Abah Ofon, Standard Chartered Bank's research analyst for agricultural commodities said soybeans could challenge the 2008 highs "because the entire edible oil/oilseeds complex is going to be quite tight this year."
He added: "This is certainly going to support corn and, to some extent, wheat but I don't think it will trigger the same concerns about food price inflation as it did in 2007/8. Principally, because soybean consumption is a bit more polarized than the other grains — wheat and rice, where the supply outlook is relatively comfortable."
Erin Fitzpatrick, Commodity Analyst at Rabobank agreed that prices could retest all-time highs. "I do think there is a risk we get to that $16/bu level again. The two potential drivers that may get us to those price levels would be further downgrades to Argentina's harvest and/or an additional drop in U.S. soybean area planted. Once we get a better feel on Argentina and U.S. acreage it will really be a weather market until mid-summer."
Fitzpatrick noted speculators were holding record net long positions, or bets that prices will rise, in Chicago soybean futures and "this increases the likelihood that a 'risk-off' trade driven by macro concerns could cause prices to sell-off to levels lower than where the tight underlying fundamentals imply." She added: "It's not just soybean supplies that are declining, we are seeing a similar trend across the entire oilseed complex."
The U.S. Department of Agriculture's World Agricultural Supply and Demand Estimates (WASDE) report for May, scheduled for release on May 10, will likely show reduce global inventory estimates with decreases in Brazilian and Argentine production and an increase in U.S. export estimates, Narayanan noted.
"After a slow start to the U.S. soybean export program, we have noted resurgence in the pace of exports that now exceeds USDA estimates."
Meanwhile, basis bids for soybeans shipped by barge to the U.S. Gulf Coast remained "seasonally high," Narayanan said, underscoring the demand for U.S. beans "as South American supplies are continually reduced."
Will US Response Be Enough?
Some see a supply response to high prices coming with John Kilduff, a partner at Again Capital, saying, "As my farmer friends say, high prices are the best fertilizer you can have."
Low prices for rival crops and high prices for fertilizer could boost this year's soybean acreage in Louisiana by 20 percent from last year, the Associated Press reported on May 2, citing LSU AgCenter soybean specialist Ron Levy.
"I would say we're going to be somewhere around 1.2 million acres," he said. That would be up 20 percent over the 996,700 acres planted last year in Louisiana.
Still, there's evidence that the increased acreage allotted to soybean crops by U.S. farmers may not be sufficient. "We maintain that the tightness of the soybean balance, both in the U.S. and globally, necessitates additional acreage expansion," Societe Generale's Narayanan said. "Looking first at the U.S., we estimate some 75.8 million acres needs to be planted to prevent inventories from falling below critical levels."
The United Nations' Food & Agriculture Organization's latest Food Price Index fell to an average 214 points in April, from a revised 217 in March, breaking three consecutive months of increases. Still, the FAO warned soybean supply wasn't keeping pace with demand, setting the stage for further price gains.
World soybean output is estimated to drop 9.5 percent to 240 million tons in the 2011/12 year, one of the steepest year-on-year falls on record, hit by poor crops in the United States and South America, the FAO said.
"Global oilcrop production will not be sufficient to satisfy growing demand for oils and meals," the FAO said. "With oilcrops other than soybeans only partly compensating for the shortfall, total oilcrop production should drop to a three-year low, down 4 percent from last season. International prices for oilcrops and derived products, which have risen sharply since January, are therefore likely to stay firm."