By John DePutter & Dave Milne – November 20, 2018
“World consumption of soybeans is expected to show only a below-average growth of 7 million tonnes in 2018/19 compared with an average annual increase of 16.4 million tonnes in the most recent five years.”
– Oil World, Nov. 19, 2018.
What it means:
How large or small it may be, any cutback by China is a blow to the demand side of the market.
To be fair, we all knew the soybean bull’s day would finally come, and the potential for lower demand is just another bearish factor for a market that is already searching for daylight.
To figure out how we got here, it’s a good idea to look at where we’ve been. As the chart below shows, global soybean production has been in a general uptrend for years – mainly to feed China voracious demand – with producers all over the world rushing to respond to profitable prices. Manitoba has been a microcosm of the global trend, as soybean acres in that province rose steadily from 280,000 in 2008, to eventually top out at 2.29 million by 2017 – a meteoric rise of over 700%.
But in the world of markets, all good things must come to an end. Thanks to ever improving genetics and producer management, global soybean yields and supplies were already rising and prices softening by the time the U.S. and China threw down on a trade war over the summer that has seen China turn away its buying from the U.S., it’s former No. 1 supplier.
China cutting back on consumption?
But more damaging still has been China’s efforts to not only source soybeans from other parts of the world, but to actually cut back on the amount of soy it consumes.
As the largest pork producer in the world, China is home to up to 700 million hogs. That means it needs an awful lot of soymeal to keep those hogs happy. But by cutting the soy ration for hogs from the typical 20% to 12%, China would achieve a demand reduction of up to 27 million tonnes of soybeans per year – an amount equal to 82% of Chinese soy imports from the U.S. last year, according to a recent analysis by Reuters.
Of course, the jury remains out on whether a reduction of that magnitude could ever be achieved or is even realistic, but it seems a safe bet that China will be trimming its soy use to at least some degree. And at a time when global soybean production has reached a new record high, that’s a supply-demand factor that cannot be ignored.
In its latest Grain Market Report, the International Grains Council pegged worldwide soybean production for 2018-19 at 369 million tonnes, a 9% increase over a year earlier. And even with a projected increase in total use from a year earlier, global soybean ending stocks are seen jumping nearly 30% to 54 million – the highest ever.
The massive increase in global supplies was already one major strike against the soybean market. Declining demand is certainly another.
Sometimes when the news is most bearish, the market is bottoming.
The real question facing farmers is this: Have soybean prices fallen far enough to account for the rising production and declining consumption?
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