By John DePutter & Dave Milne – February 19, 2019
“After becoming the hot new crop in parts of Canada’s prairies, soybeans are starting to lose their appeal as Donald Trump’s trade war with China drives down prices.”
– Bloomberg, Feb. 16, 2019
What it means:
Let’s face it, Canadian soybean planted was likely set to decline further in 2019 anyway, regardless of the US-China trade battle.
Although dry Prairie conditions are also cited as a contributing factor, the Bloomberg article largely attributes this year’s expected drop in new-crop Canadian soybean planted area to the trade war, which has negatively impacted Chicago futures – upon which prices on this side of the border are based. And that is certainly true; farmers typically don’t devote more acres to a crop that doesn’t pencil out as well as another.
But while the trade battle has no doubt pressured soybean prices, the reality is that years of increasing production and supplies – in Canada, the US and around the world – were already starting to turn this market from a winner to a loser.
Soybeans losing lustre
Ever since soybean futures traded up near US$18/bu in 2012, the world’s farmers have jumped aboard the soybean train. What’s happened in Canada is a prime example. As the graph here shows, Canadian soybean planted area peaked in 2017 at 7.28 million acres, up 30% from the year prior and an 89% increase from the 2011 level of just 3.85 million. But with soybeans losing their lustre, Canadian planted area already started to turn lower last year.
It’s also worth noting that while soybean area in the main production province of Ontario expanded, a big portion of the nationwide gains in acreage came in Western Canada, a non-traditional growing area. Indeed, Statistics Canada didn’t even begin estimating soybean planted area in Saskatchewan until 2013. In Manitoba, soy planted area largely bounced around between 200,000 and 500,000 acres from 2001 to 2011 before quickly scaling up to 2.29 million in 2017.
Global supplies building
Meanwhile, global soybean ending stocks for the 2018-19 marketing year are currently estimated by the USDA at 106.7 million tonnes, up from 98 million and 95.7 million the previous two years and almost double the 2011-12 level of just 55.1 million.
It is often said that high prices in markets are the cure for high prices, in that farmers will produce more when the return is more attractive, and users will use less as they are forced to pay up. It’s all just part of the natural rhythm and flow of the markets, as prices swing from high to low and then back again.
That dynamic is in play now; with farmers planting more and more soybeans and average yields mostly trending higher, the supply has gotten so ample it is now being reflected in declining prices. Obviously, the US losing its biggest soybean export customer in China hasn’t helped prices. But this chicken was always going to come home to roost, regardless.
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