USDA released its important May commodity supply and demand update on May 11, including its first update of 2007-08 season prospects since the early March Outlook Conference. The updated estimates for 2007-08 are the first to incorporate USDA’s March U.S. acreage planting intentions survey estimates for 2007. Ongoing world trade and crop changes were incorporated as well.

For soybeans, the burdensome old crop stocks level of 16.6 million tonnes is forecast to tighten to 8.71 million tonnes by the end of 2007-08 due to the smaller crop. USDA chose to project a lower 2007 soybean yield as well at 2.79 tonnes per hectare versus 2.87 tonnes per hectare in 2006. Lower plantings and continuing strong demand with exports of 29.4 million tonnes and crush of 48.7 million tonnes could absorb much of the reduced crop, in USDA’s view. Soyoil use in biodiesel soars to 1.72 million tonnes from 1.16 million tonnes and oil stocks drop to 988,000 tonnes. These are historically adequate soybean and oil stocks levels, but reflect shrinking stocks to use coverage.

Global oilseed production for 2007-08 is projected at 399 million tonnes, down 3.8 million tonnes from 2006-07, according to USDA. If realized, this will be the first year-to-year decline in global oilseed production since 1995-96. Global oilseed ending stocks for 2006-07 are projected at 68.3 million tonnes, with most of the increase due to higher projected soybean stocks in South America resulting from reduced export prospects for Brazil and Argentina. Soybean stocks for Brazil and Argentina are projected at a record 38.4 million tonnes, up 4.2 million tonnes from 2005-06. China soybean imports for 2006-07 are projected at 30 million tonnes, USDA said.

Ethanol, biodiesel and other renewable fuels will be a “big part” of the new farm bill to help ensure those industries take root, said Senate Ag Committee Chairman Tom Harkin (D-Iowa). “I don’t think we’re moving fast enough on renewables,” Harkin said following a hearing on May 9 regarding biofuels and rural economic development. Harkin said he did not have a funding target for renewable fuels, partly because Congress has yet to agree on a budget blueprint.

Issues addressed at the hearing included the need to lower the cost of ethanol from cellulosic materials and the need for a shipping network to handle the huge growth in ethanol. Robert Grabarski of the National Council of Farmer Cooperatives said that without a transport web, there could be an ethanol glut in the central states and large ethanol imports to coastal states.

Biodiesel maker Neil Rich, CEO of Riksch BioFuels of Crawfordsville, Iowa, said a new incentive was needed to offset the impact of imports on the industry. The National Biodiesel Board and the American Soybean Association support the proposal, worth 43 cents per gallon of imported biodiesel. The payments would be based on the price of soybean oil and the difference in Argentina’s tariffs for biodiesel exports and soyoil exports.

American Soybean Association First Vice President John Hoffman said the new farm bill should contain “specific pro-biodiesel measures, including a Biodiesel Incentive Program.” He said this program would operate similarly to the Commodity Credit Corporation (CCC) Bioenergy Program, which he said worked well in encouraging expanded biodiesel production in recent years. USDA would use CCC commodities to reimburse U.S. biodiesel producers on all biodiesel production.

In related news, Sen. Chuck Grassley (R-Iowa) is one of the lawmakers in support of trying to find an offset to biodiesel imports getting the benefit of the current tax incentive program. This issue could become part of the emerging omnibus energy bill rather than part of the new farm bill, due largely to jurisdictional problems.

The consumption of soybean oil in methyl esters (dominantly biodiesel) jumped to a record 99,800 tonnes during March, surpassing the August 2006 record of 94,300 tonnes. After last August, biodiesel production was undermined by an erosion in profit margins. While margins have steadily improved since bottoming out in November, March is the first month that biodiesel production has posted a significant rebound, which could very be well be due to the end of winter and the attendant problems of using biodiesel during those months.

U.S. barge freight rates have been unimpressive the past two months, trending lower from 285 percent of tariff off the Illinois River in early March to 214 percent on May 1 – a drop of about 25% during this time. But, this type of downward trend is not uncommon, and in fact, is right in line with normal expectations. Last year the rate dropped 25%. Two years ago the drop was 40% while over the past 5-years the average decrease has been 24%. Rates off the Illinois River trend lower as the Upper Mississippi River re-opens to navigation and the surge of traffic following the opening settles down. This year, there really has been no surge in traffic, but nonetheless the pattern in rates is inline with history.

Historically, rates in June will increase 2%. Rates are expected to increase 45% to 311 percent of tariff during August. Last year the rate increased 55% from May to August while historically it increased 36%.

The soy complex was mostly lower on May 10 as good planting weather continued to weigh heavily on the corn market, while soybean prices have been relatively firm as prospects for acreage to switch from corn to soybeans diminish. USDA’s new-crop carryout was not that far below the average analyst estimate (roughly 408,000 tonnes smaller); however, USDA’s new-crop balance sheet probably will be viewed as being supportive for prices given the sharp year-to-year decline in ending stocks and what that portends for 2008-09 if U.S. soybean plantings are no bigger in 2008 and there is not a sizable increase in South American acres. The strength in the Brazilian real is lessening the incentive of $8.00 May 2008 futures to expand production. As such, nearby soybean futures may be sustained above $7.00 except for later this summer when remaining old-crop supplies move off of the farm ahead of harvest. This late-summer period could result in extremely weak soybean meal prices and an unusually high soybean oil product share if petroleum prices sustain current levels. Malaysian palm oil stocks are tightening on disappointing production and strong exports. May bean futures closed down $0.28 finishing at $269.33; July was $0.46 lower, closing at $274.20; and August lost $0.37 ending at $276.68. May meal was down $3.31 closing at $213.74; July was $3.31 lower, finishing at $219.25; and August lost $3.31 to close at $222.22. May oil closed $10.14 higher to finish at $734.13; July was up $9.04, closing at $743.39; and August gained $9.26, ending at $748.24.

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