There's a battle underway in the commodity sector-soybean, corn and wheat markets are all signaling for more acres to be planted. What's unusual is that the wheat sector is the only one that should be sending strong signals because of a second year of poor worldwide wheat crops. In fact, wheat was setting new highs in early September, with Chicago December wheat contracts trading well over $8 a bushel. In the meantime, this year's all-time record corn crop should have depressed prices far more than it did; and last year's record soybean crop and healthy carryover forecast for this fall should have resulted in lower prices. Despite those market fundamentals, both soybean and corn markets-although not posting any records-remained strong the past several months. "Last year it was clear we needed more corn acres and the market signaled producers to do that," says Darrel Good, University of Illinois agricultural economist. Farmers responded by planting more corn and less soybeans, planting 64.1 million acres of soybeans in 2007, down from the 75.5 million acres that produced last year's record soybean crop. "Now we'll need more acres of everything, and how do you do that?" Good says.

Three things are keeping markets strong, Good says. "Biofuels plays a big part and corn ethanol has been the major driver," he says. "World demand for livestock feed continues to be strong, particularly from China; and wheat has had two consecutive years of small crops worldwide."

The market will be watching for two things as winter approaches-how much winter wheat is planted and what South American growers will do as planting progresses in October. The USDA is forecasting a modest increase in soybean acres in Brazil and Argentina but that won't offset the decline in U.S. production, Good says. "The chatter is that winter wheat seedings will be going up this fall with the high price of wheat," he adds. For the past 20 years, winter wheat acres have declined, mostly to the benefit of soybean acres. "All of that says soybean prices could remain extremely volatile but generally high priced over the next 12 months," Good concludes. That's good news from a producer's standpoint because they will be able to take advantage of higher prices. However, prices will be all over the board.

Basis Widens
Although soybean futures prices are strong that hasn't been reflected in local cash prices. "There's a huge basis difference between what the futures market says and what users are willing to pay," says Elaine Kub, market analyst for Omaha, Neb. - based DTN. DTN's national average for basis was showing $1.03 in late August, with a range of 40 to 50 cents in areas of Ohio and Indiana and a $1 or more basis farther west to a high of $2.21 per bushel in North Dakota. In September 2006, the national average basis was 60 cents. The basis narrows in the Chicago area reflecting lower transportation costs as producers can deliver grain on a contract, she explains. In other areas, the basis reflects both transportation costs and local demand. "The cash price of soybeans had to reflect the current surplus of soybeans that we have," Good explains. "The futures market has a lot of speculative froth in it. An interesting question will be as the surplus disappears, will cash prices catch up to the futures?" Good expects basis levels to return to normal this winter, but adds that speculative interest in the futures markets could push prices out of line again.

Soybean prices have experienced a wider range than corn in trading, Kub says. Soybean futures ranging from $8 to $9 per bushel are not surprising. In 2004, soybean prices hit a record- high $10. July's high of $9.15 followed seasonal patterns of posting a summer high then trending down toward harvest, Kub says. "Looking into October and harvest, we predict the market won't retest those highs," she said at press time. However, the early September jump in wheat futures pulled the November soybean contract back above $9. Kub predicts that with the competition for acres, soybeans will likely stay above $7.

Canola Market Follows
A disappointing Canadian canola harvest will help keep oilseed prices up. Canadian canola producers had the potential to harvest a big crop, seeding 14.5 million acres last spring compared with 12.5 million acres the previous year. The spring weather started out nice but turned wet in early summer and then turned dry. John Duvenaud, publisher of the Wild Oats Grain Market Advisory based in Winnipeg, was predicting a 10.5 million ton canola crop early in the season, but by late August as Manitoba finished its canola harvest and Saskatchewan was beginning to combine canola he downgraded that to 9 million tons. The crop outlook sent canola to $8.30 per bushel at the elevator, compared with recent prices of $6 to $6.50 per bushel.

Almost all the Canadian canola crop is used for human consumption, with less than 5 percent going for biodiesel, Duvenaud adds. Because Canada uses genetically modified canola it can't export to the European Union. However, the country of Dubai imports Canadian canola, crushes it and exports the oil to Europe where it's used to make biodiesel.

Globalization and Biofuels
Duvenaud points to globalization and biofuels as the big drivers behind the growing oilseed demand. "India, China and a lot of countries like that are growing at 8 [percent] to 10 percent a year," he points out. That has led to an increasing demand for oil crops as diets improve. "Biofuels have sopped up all the excess grain and oilseeds in the world," he adds. Even in Brazil, a country that has been expanding soybean acres, the return on corn has recently been above the return on soybeans. That will keep Brazilians from planting more soybean acres.

Palm oil is slower to respond to changing markets as new plantings take about five years to produce. The Malaysian palm market, however, did have an impact on the Chicago soybean market earlier this season, Kub says. "It was interesting to watch," she says. "On a given day we would see what happened in Malaysia overnight and soybeans would do the exact same thing." When the May-June rally in the Malaysian palm oil markets fell off, the Chicago soybean market went back to following its own fundamentals based on summer weather patterns. Another international influence on the Chicago market, she adds, is Brazil and Argentina producers who hedge their soybeans on the Chicago Board of Trade and look for high enough soybean prices to offset the weaker U.S. dollar.

China's soybean crop prospects also impact the market. In its mid-August oil crops outlook, the USDA Economic Research Service reported that much of northeastern China, where the majority of the soybean crop is grown, was suffering through the worst drought in many years. Strong export demand has the USDA predicting soybean exports will reach a record high of 1.1 billion bushels for the 2006-'07 crop year. The August report predicted that the 2006-'07 average price for soybeans would be $6.40 per bushel and forecast the 2007-'08 price at a $7.25 to $8.25 per bushel.

USDA also reports a continued strengthening in values for soybean oil. The July average price for soybean oil in central Illinois was 34 cents per pound compared with 25.7 cents in June. The USDA reports continued strong exports, but domestic food use of soybean oil is trailing last year by nearly 2 percent with other vegetable oils expanding their share of the U.S. food market.

Biodiesel Use Up
Biodiesel is absorbing some of the market share that was lost in the food market. This year, the USDA began reporting data collected by the U.S. Census Bureau on soybean oil used for biodiesel production plus the figure for total oils and fats used for biodiesel. In July, consumption for biodiesel was accelerating at a fairly rapid rate, Good says. In January 2007, the census bureau estimated 202 million pounds of all fats and oils were used for biodiesel, which is just under 8 percent of all fats and oils consumed. In July, that number was 392 million pounds representing 13 percent of total consumption of fats and oils. "That is a demand piece that is going to be important," he adds.

Biodiesel producers are watching the soy market closely. "We're concerned about the strength in the soybean oil market," says Dave Elsenbast, who directs procurement for the Renewable Energy Group (REG) headquartered in Ralston, Iowa. "The economics get squeezed very tightly when the market is up this high." REG produces 162 MMgy from six biodiesel plants and has another 180 MMgy under construction. Elsenbast says the competitive market environment for biodiesel makes it hard to pass along the costs. "As I speak to people in the industry or read estimates on [soybean oil] costs for the next year, most put us in the 32 to 36 cent [per pound] board average." REG's response has been to focus on the things they can control such as producing a quality product and taking the correct steps in sales, marketing and risk management, he says. Two of REG's plants under construction are being built next to Bunge oil crushing facilities, which will help control expenses. And its plant in Ralston, Iowa, is next to the West Central Co-op crushing facility. "It helps lower transportation costs on feedstocks," Elsenbast says. "In many cases, transportation costs can be a penny a pound on soybean oil."

Daryl Dahl, vice president of corporate hedging for Omaha, Neb.-based Ag Processing Inc. (AGP), doesn't expect the volatility in the soy market will end anytime soon because of the demand for corn. "It's the biggest jump in demand for corn we've ever seen," Dahl says, adding that with last year's soybean crop a record and the carryover one of the largest ever, soybeans should be trading much lower. "If it weren't for ethanol, soybean prices would not be trading where they are today," he says. AGP represents five regional and 194 local cooperatives. It operates nine soybean processing plants and markets its trademarked SoyGold biodiesel manufactured at its 30 MMgy plant in Sergeant Bluff, Iowa. A second 30 MMgy plant is expected to be on line this fall next to the AGP crushing facility at St. Joseph, Mo. The added speculative interest from the hedge funds in the commodity market has added to its overall volatility. "We probably are going to have a couple more years of this before things settle down," Dahl says.

Susanne Retka Schill is a Biodiesel Magazine staff writer. Reach her at sretkaschill@bbibiofuels.com or (701) 746-8385.