As the drought in the US Midwest continues to worsen, attention is once again shifting back to the soybean market, which analysts fear could be set for very tight supplies and significant price rises over the coming months.

Soybeans hit the headlines earlier this year when drought in South America damaged crops, but debate about the current US drought has focused largely on reduced maize yields.

However, analysts are now also expecting considerably lower yields for US soybeans, which - combined with the earlier problems in South America - could lead to dramatically-reduced global soybean stocks.

“These issues will likely see soybean prices support the entire grains and oilseed complex in the coming weeks,” said analysts at Macquarie in a new report on soybeans, published this week. If drought conditions in the US did not improve soon, soybean prices of between $19 and $20 per bushel - compared with about $15.5 per bushel now - were a “very real prospect in the near term”, they added.

Commodity prices 28 July 2012: Corn and wheat prices soar
No surprises at the top of our table - as weather problems continue to batter the world’s key grain-producing areas, wheat and maize prices are soaring. Maize has risen by 26.5% in the past month, driven by concerns over the continuing US drought affecting yields, and now stands at £193.8/tonne - up 5.8% year-on-year.

At £229.8/tonne, UK milling wheat is nearly 30% dearer than last month, and up 15% year-on-year, with French milling wheat and UK feed wheat also up by double digits due to drought and floods.

Meanwhile, on the industrial side, pulp, steel and plastics are all lower than last month and last year - despite crude prices edging up by nearly 10% in the past month.

The situation could remain precarious long into 2013, Macquarie warned. As US soy yields are likely to fall significantly short of expectations, it is vital for South America to produce a strong soybean harvest in 2013 to help replenish global stocks, the analysts said.

South American soybean production is expected to increase significantly in 2013 - particularly in Brazil - but this increase could be under threat if farmers start switching from soybeans to maize - a real prospect, given soaring maize prices.

China is the world’s most important importer of soybeans, and its growing demand for soybeans would be “nearly impossible to ration”, even if global supplies fell, Macquarie said. “This means that prices will have to trade at a level that encourages destocking down the entire chain of production,” the bank added.