By John DePutter & Dave Milne – May 22, 2019
“The US is likely to permanently lose soybean export market share in China the longer US-China trade talks drag on, a top executive at the US Soybean Export Council (USSEC) industry group said on Friday.”
– Reuters, May 17, 2019
What it means:
The soybean market needs to keep doing the job of discouraging production.
Back when China first slapped new import tariffs on US soybeans last summer, there was a sense among a number of agricultural economists that while traditional trading relationships might be upset, the world would still consume the same number of soybeans as it always had.
So, even if China wasn’t buying as many beans from the US, China’s purchases from other suppliers would open up corresponding opportunities for American soybeans in other, non-traditional markets. In the end, it was speculated things would all work out and the US would ultimately export as many soybeans as it always had – just to other destinations.
However, the numbers didn’t bear that out. Yes, the US did ship more beans to other parts of the world, including the EU, but it wasn’t nearly enough to offset the loss in business to China. Accordingly, soybeans are backing up in the US. The latest USDA supply-demand estimates released earlier this month forecast 2018-19 US soybean ending stocks at a record heavy 995 million bu and 2019-20 ending stocks just slightly lower at 970 million bu.
World soybean supplies also remain heavy, with 2019-20 global ending stocks forecast at just over 113 million tonnes by the USDA, little changed from the previous year but up about 14% from 2017-18.
Given the heavy supply outlook, futures recently skidded to their lowest in over 10 years. And the USDA recently pegged the season average new-crop soybean price at just US$8.10/bu – a long way down from the late 2010 through mid-2014 period when Chicago soy futures spent a significant amount of time above the $13 mark.
It’s all enough to convince American farmers to start cutting back on soybeans after years of unprecedented expansion brought on by strong demand from China and profitable prices.
Long-term acreage uptrend reversing
American soybean planted area was trending up from 1990 through to the record 2017 high of 90.16 million acres. Such a trend was unsustainable and now with the US/China trade battle (not to mention China’s problems with African Swine Fever) the fundamentals are coming into play for a reversal in this major trend.
This spring, US producers were intending to cut back on soybean acres, with the USDA’s March prospective plantings report putting 2019 soy area at 84.6 million acres, down 5% from a year earlier, as shown above.
Something new might interfere with those intended reductions: This week, there were rumours the Trump Administration might pay soybean growers as much as US$2/bu to offset the collateral damage of the ongoing trade battle with China. If true, that could prompt more soybeans to go in the ground than earlier thought. Such a move would partially offset the message from the market, which is to grow fewer beans because the money’s not there.
Weather conditions are problematic this spring, which will also have an impact on the acreage mix this year.
But basically, politics and weather notwithstanding, in the big scheme of things, there is only way to cure the heavy supply of soybeans with the backdrop of declining demand by China: grow less.
Whether it’s this year, or next year, production needs to decline.
That stands for production in the US and elsewhere too.
It boils down to this: The free marketplace is trying to do the job of curing the glut with low prices. It has been working at this job for over two years. The job is not done yet. There is still more work to be done.
Check in with both the DePutter overviews and the shorter-term updates.
This big picture ebb and flow of the free markets – from enticing more production through high prices to discouraging production through low prices – is a very basic maxim that the DePutter company follows on a regular basis.
We start with the big picture themes and from there drill the analysis down to the shorter-term price swings. We look forward to offering our overviews and to zeroing in on the daily ups and downs for you.
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