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A demanding year ahead for soybean markets

With bumper crops expected around the world, soybean growers will need to juggle currency rates, weather anomalies and key demand drivers to find their best soybean price in 2018

A demanding year ahead for soybean markets

Soybeans are a great crop to grow. This is reflected in the 3.1 million acres of soybeans grown this past year across Ontario. Driving from Windsor to Montreal and beyond, soybeans are a common sight. It’s on the other side of the world, though, that China, the world’s biggest consumer of soybeans, imported a whopping 97 million metric tonnes in 2017.

Canadian soybean production is a vibrant example of the strategy here to satisfy large food demand especially in distant parts of the world.

In 2018, soybeans will likely remain an integral part of Canadian farmers’ production plans. The 3.1 million acres grown in Ontario last year is a far cry from back in the 1980s when Ontario soybean production struggled to get to the million-acre mark. Those days are certainly in the rearview mirror as last year Québec produced approximately 983,500 soybean acres to make Eastern Canada a soybean powerhouse. The Maritime provinces chimed in with 83,500 acres.

That Eastern Canada soybean economy is increasingly being challenged by bigger acres in Western Canada. For instance, in 2013 Statistics Canada first measured Saskatchewan soybean production at approximately 170,000 acres. Those acres have exploded to the point where in 2017 Saskatchewan produced approximately 850,000 acres of soybeans.

The same can be said for Manitoba, where in 2017 almost 2.3 million acres of soybeans were produced versus approximately 1.05 million acres in 2013. Clearly, western Canadian soybean country is growing. A soybean crusher may surely follow. There certainly may be hiccups along the way going forward, but soybeans continue to expand across the country.

The cash price for soybeans in southwestern Ontario as of early January 2018 was approximately $11.30 per bushel. The new crop price for delivery in November 2018 is approximately $11.40 per bushel. These prices are lower than previous years and in Western Canada cash price levels are generally lower than Ontario, reflecting cash market realities. Of course, in 2018 the soybean market will change, flex and react to different marketing factors. What will the price do in 2018? What are some of those marketing factors that Canadian soybean producers need to measure in order to capture those profitable marketing opportunities?

Clues to future price direction are always elusive but a look back on how we got through 2017 is always important. Canadian cash prices are discovered by a combination of a futures price plus a basis adjustment, which reflects local market conditions. For soybeans in Canada the value of the Canadian dollar has a huge impact on the cash price of soybeans. In fact, in 2017 the cash price ranges for soybeans tended to be higher than the futures price range in soybeans. That happened because the value of the Canadian dollar was very volatile in 2017.

On January 12, 2018, the USDA released their final crop estimates for 2017, pegging final soybean production at 4.39 billion bushels, based on a national yield at 49.1 bu./ac. The harvested U.S. acreage for soybeans was up eight per cent from 2016 at 89.5 million acres.

The nearby March 2018 futures value was approximately $9.60 per bushel. Of course, this pales in comparison with the all-time soybean record of $17.89 per bushel reached in 2012. In fact, since 2007 there have been many instances where the soybean futures prices have been a lot higher. We got here with our eyes wide open. Global soybean production has been expanding.

Part of the reason that soybean prices declined into 2018 has had to do with benign weather in the American soybean belt over the last five years, where production has been very stable. Soybean acreage actually increased in the United States in 2017, up seven per cent from 2016 at 89.51 million acres. Soybean futures in early 2007 had been at a premium to corn futures and American farmers decided to ramp up soybean production. This helped garner the 4.39 billion bushels in 2017, which further softened prices. Of course, as we look into the planned acreage in 2018, huge soybean stocks weigh on our prices.

There is a lot more to the story, and any look at the global soybean economy needs to account for Brazil and Argentina. Production in Brazil has been increasing through the years and the country is currently projected to produce a crop of 110 million metric tonnes of soybeans in 2018. This crop is in the ground in Brazil and any production hiccup will certainly affect soybean fundamentals and cause volatility in prices.

Argentina is projected to produce 57 million metric tonnes and along with Paraguay and others represents the growing domination of South America within the global soybean economy. China, always thirsty with an almost insatiable demand for soybeans, buys most of their beans from South America.

Price is always an issue or the lowest common denominator on where China sources their soybeans, but the environment for South American soybeans is also producing a soybean which is higher in protein than American soybeans. This is part of the reason that China is showing a preference for South American soybeans.

Unlike corn, where the United States dominates world production, the soybean global economy is more of a two-headed monster with North American versus South American production in two different time frames during the calendar year. While harvest time in North America is September, October and November, Brazil will plant their soybeans in October, November and December, and Argentina in November and December. Weather-related production problems could have an impact on the South American crop during our winter, which often creates marketing opportunities for Canadian farmers. There is much to consider especially when thinking about the geography and the timing. Daily market intelligence is key.

That daily market intelligence can be difficult especially when a large part of the Canadian soybean price is a positive basis largely created through a lower Canadian dollar. As stated earlier, sometimes volatility in the Canadian dollar will create a wider cash range in price through the year than a futures range.

Increasingly, many Canadian soybean producers are realizing this and they are becoming flat price sellers. In fact, when the Canadian dollar is quite low, as it was in 2017, getting into the $.72 range, selling regardless of futures price seems to be the opportune thing to do. Many producers will watch the value of the Canadian dollar closely looking for the best flat price, regardless of where soybean futures prices are.

Generally speaking, the Canadian dollar moves in an opposite direction of where the American dollar goes. Also, good economic news is good for the Canadian dollar, and Bank of Canada interest rate increases do the same. Canadian soybean producers need to be dialled in to these events.

As spring gets closer there will be much debate on how many U.S. soybean acres versus corn acres will be planted in 2018. This will partially define price movement in soybeans depending on what happens in South America in the first six months of 2018.

Will the United States plant more or less corn in 2018? Will the United States produce significantly more than the 90.1 million acres of soybeans they planted in 2017 or significantly less?

This debate and actual acres planted will influence soybean futures prices greatly as we move further into 2018.

It is the great truth that to increase soybean prices significantly, we need a lot less soybeans in the world to go along with this robust demand.

Nobody wants production problems, but it might take that in some part of the world to increase soybean futures prices significantly. Geopolitical events gone wrong can also affect the futures price of soybeans.

The challenge, of course, is to measure all of these marketing factors in 2018.

Keep abreast of the soybean production cycles here and in South America. Focus in on the Canadian dollar influence on basis. 2018 will surely be a year with many soybean marketing opportunities ahead.

This article was originally published in the 2018 issue of the Soybean Guide.

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