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2015 soybean market outlook

Soybean Guide: Demand is keeping pace with increased production, but will that continue? Here’s what to watch

With every new year come great challenges. For Canadian farmers looking out into their 2015 planning horizon, soybeans are increasingly a large part of that. Where once soybeans were relegated to the deep southwest of Ontario, now there are three million acres in Ontario and 836,000 in Quebec, plus over one million acres in Manitoba with continued expansion expected every year in Western Canada.

For the soybean, it seems the best of times. But will this continue? As we look into 2015, what are the market factors that will determine our price expectations?

It used to be said in southwestern Ontario that all you had to do was plant soybeans and wait. The conventional wisdom at the time was that you planted them in a cloud of dust, tried to control the weeds and eventually you would have a crop at the end of the day. However, over the years, with the expansion in the acreage, management has also evolved. There is no particular silver bullet to increase soybean yields. It’s more of a silver shotgun involving many management factors which help achieve that goal.

It is the same on the soybean marketing front. In 2015, producers will need to consider many marketing factors that are impacting the soybean complex.

In 2014, Canadian soybean farmers watched from a distance as our American friends produced a record crop. The United States last year planted a record 84.2 million acres of soybeans and harvested a record yield of 47.5 bushels per acre. That was a tremendous increase in acreage from the previous year when U.S. soybean farmers planted a crop of 76.8 million acres. This record crop in the United States created somewhat of a bearish environment where prices moved down throughout 2014, bouncing back to some extent into a rally starting in late October. Of course the question that has to be asked moving forward is how many soybeans will U.S. farmers plant in 2015, and what impact this might have on price going forward.

According to many private estimates, U.S. producers are set to increase the area of soybeans to 88 million to 90 million acres this coming spring, beating last year’s record. If we put a hypothetical yield of 45 bushels per acre to that production, we’ll be very close to the record production of 2014 of 3.958 billion bushels. At first glance, it is certainly setting up as a year where a lot more soybeans get planted and if Mother Nature plays nice, there will be great production in the fields.

Keep the $10 soybean futures mark in mind. For instance, as the clock turned over to January in 2015, the nearby futures month was at approximately $10.02 a bushel. This put cash soybeans in Ontario at approximately $11.40 a bushel when you consider basis. Needless to say, the $10 mark in soybeans will always serve as a litmus test for some producers. The production in both North and South American fields in 2015 will largely determine whether that price resides north or south of the $10 mark.

The $10 mark will largely be determined by crop size but also by demand and ending stocks. The projected U.S. ending stocks for soybeans in the 2014-15 crop year are 410 million bushels. This is considered quite onerous, especially when last year ending stocks actually dipped below 100 million bushels to 92 million bushels. This was unprecedented at the time and reflected an unusual shortage of old-crop soybeans.

Looking ahead, if demand stays strong and even climbs possibly to 3.85 billion bushels in 2015, we may still end up with ending soybean stocks over 400 million bushels in the U.S.

Of course the United States always has a tremendous effect on the price of soybeans, but our South American friends now grow far more than the United States. For instance, the December estimate from USDA pegs U.S. production at 107.73 million tonnes of soybeans. When you combine Brazil, Argentina and Paraguay together you get production of 157.2 million tonnes. Clearly, this production in South America has a huge effect on the price of soybeans looking ahead. Into our mid-winter, South American weather has been benign, which is positive for soybean yields. This South American soybean crop size will be a critical factor in determining the price of soybeans.

The elephant in the room in any discussion with soybeans is China, which seems to have an insatiable appetite for the world’s soybeans. It is set to import 74 million tonnes in 2015 and this demand is growing. There is always a lag time between U.S. and South American supplies to China. This is likely to happen in 2015, just as it has happened in previous years. Last year with old-crop supplies being very tight, it was a bit of a scramble to source beans into China especially with the logistical problems in South America. This year, even with those South American logistical issues, more soybeans translate into a smoother transition on that import.

For Canadian soybean producers, there are two great production areas to look at, the United States and South America. First up is South America where soybeans will be flowering and filling in January and February with the main harvest commencing in March. Any weather issue in this time frame will affect the futures prices. It will be the same in the U.S. with the planted acreage figure being key to that equation. The first clue to how many acres American farmers will be planting will be announced in the USDA report on March 31, 2015.

Any discussion regarding grain prices in Canada must also include the value of the Canadian dollar. The Canadian dollar has dropped from par values in late 2013 down to the low 80s in January 2015. Soybeans are priced in U.S. dollars at Ontario end-users and a simple currency exchange can add large amounts on to cash values, especially when the dollar is low. For instance, old-crop basis values sit at approximately $1.15 a bushel over the March futures in early January. A par dollar or the loonie at a premium means negative basis levels for soybeans. This movement in the Canadian dollar must always be considered, as its importance to cash prices to producers is always critical. Hedging the futures and considering the Canadian dollar go hand in hand on Canadian farms.

However, it’s a two-way street. The value of the Canadian dollar is directly related to the value of the U.S. dollar and to some extent to the price of oil. As the Canadian dollar has dropped, the value of the U.S. dollar in comparison has done the opposite. It has been going up, acting as a drag on all commodity prices. In 2015 it will continue as long as the U.S. dollar shows buoyancy, and this will temper agricultural futures prices.

So as we move ahead into 2015, after the South American crop is in, North American acres will become very important. Along the way, USDA reports will always serve as flashpoints for market action. The March 31 USDA prospective plantings report will be the first big benchmark in the new-crop marketing year. The June 30 USDA planted acreage report will be the second big benchmark for futures prices going into summer. Producers will need to consider these two reports when hedging soybean prices for the new-crop season.

The road ahead in 2015 for soybean farmers will surely be challenging. It is often said that soybeans can be the great liars, since their production potential is often very difficult to measure in season. With expanded acres this year and somewhat onerous ending stocks, pricing those soybeans may add to their reputation. However, at the end of the day, soybeans always tell the truth. There will be marketing opportunities ahead. Unknown geopolitical events can always come along to upset the most considerate market projections. Risk management never gets old, and that certainly is the case with soybean pricing in 2015.

This article was originally published in the February 2015 Soybean Guide

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