South America has surpassed the U.S. in soybean production
and displaced the U.S. as the dominant player in the global soybean
market. Its emergence as a major U.S. competitor has put downward
pressure on U.S. prices, changing the market dynamics of the soybean
sector and the economic relationships that have traditionally
been used by USDA for price forecasting. USDA forecasts of the season-average
price received by U.S. farmers are an essential tool for government
budgeting. These price forecasts are also used by industry analysts
and farmers for planning and decisionmaking.
Fundamental to the models used by USDA to forecast soybean prices
is a strong economic relationship between U.S. commodity prices
and the ratio of U.S. carryover stocks to use—the higher the
stocks relative to use, the lower the price. But with the rise of
South American soybean production, this relationship has lost some
of its predictive power. Forecasting equations that proved reliable
for years are now less accurate, and commodity analysts have to
rely much more on ad hoc adjustment factors to account for the structural
change. Analysts need a more rational system for forecasting U.S.
season-average soybean price that incorporates the impact of increased
South American soybean production.
Recent ERS research found that using South American soybean production
in addition to the U.S. carryover stocks-to-use ratio helps to better
forecast U.S. soybean prices. Increases in either variable will
lower the expected price. The equation estimates that a 1-percent
increase in the carryover stocks-to-use ratio reduces the U.S. season-average
price by about 0.4 percent and that a 1-percent increase in South
American production reduces the U.S. soybean season-average price
by about 0.5 percent. The latter estimate is the direct effect of
South American production on the U.S. soybean price.
But, the U.S. carryover stocks-to-use ratio adjusts downward
in response to increased South American production. Increased South
American production may result in less need for U.S. carryover stocks
(though the exact relationship between South American production
and U.S. stocks is a researchable question). Regression analysis
of the data indicates that a 1-percent increase in South American
production reduces the U.S. carryover stocks-to-use ratio by about
0.6 percent. The 0.6-percent reduction in the U.S. stocks-to-use
ratio from a 1-percent increase in South American production,
plus its direct effect on the U.S. price, reduces the U.S. soybean
price by a composite of about 0.25 percent.
Expanded competition from South America is having a significant
impact on the soybean market and on soybean price-forecasting models.
ERS analysis shows that the U.S. stocks-to-use ratio and South American
soybean production were important variables for forecasting price.
Further, the indirect effect of South American production on the
U.S. soybean price should be considered when making price forecasts
and when budgeting for government payments.
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