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Canadian farmers enter a challenging soybean market

Soybean fundamentals have changed and may never go back. What’s a grower to do?

Soybeans can be a real adventure. Growing them can certainly be a challenge. There is a lot more to soybeans than simply putting them in the ground and watching them grow.

Soybeans are also big business in Canada. From the research labs across Canada to the ports and processing plants where they are shipped and utilized, there is an active value chain spurring economic activity. Soybeans are good for our economy and good for Canadian farmers.

Soybeans once were limited to the deep southwest of Ontario. However, starting in the late 1970s and 1980s better short-season genetics transformed the crop to a point where now soybeans are showing up in varying acreages across Canada. In 2019, they’re a staple in the crop mix of P.E.I., Quebec, Ontario and Manitoba.

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According to Statistics Canada, farmers reported planting 5.7 million acres of soybeans in 2019, which is down 9.6 per cent from 2018. In Ontario this year, farmers reported planting a record 3.1 million acres of soybeans. This was attributed to a very late spring, where many soybeans were planted instead of corn. Manitoba was the main reason for the decreasing Canadian soybean acres. In 2019 the soybean crop in Manitoba was down 22.2 per cent to 1.5 million acres vs. 2018. Quebec reported soybean acres down slightly to 906,200. Saskatchewan chimed in with 150,000 acres and P.E.I. came in at 46,400 acres of soybeans.

The 2019 growing season was extremely difficult in Ontario. Many soybeans were planted late into June and early July as wet weather delayed planting. This is one reason why we have a record acreage in 2019. At the same time the weather was quite good for planting in Western Canada, but dry conditions in Manitoba did affect the 2019 crop. Interestingly, fickle weather conditions and reduced yields over the last two years have hurt soybeans in Manitoba and Saskatchewan. Problems with lower protein content in Western Canada and better opportunities with canola have also weighed in.

Clearly, though, Canadian farmers do like planting soybeans. However, the challenge for farmers is to profitably grow and market these soybeans in a constantly changing market place.

Soybeans are traded in a global market. The two biggest production areas in the world are in the United States and in Brazil and Argentina, with generally opposite production seasons.

Soybean futures are traded at the CME in Chicago, where price discovery is made based on a futures market. Cash prices within North America are based on a nearby futures value plus or minus a basis value, which reflects local demand.

At the start of the Ontario harvest, soybeans prices were approximately $11 per bushel for both new and old crop soybeans. This was based on a November futures prices of $8.95 close on September 12 with a $2.05 basis value above the futures price. This price was actually higher than a year ago, but much lower than soybean prices in May 2018 when the nearby futures price hit $10.42 per bushel, approximately $1.50 higher than at September 12, 2018.

This is largely due to the exit of China from the American market, and to last year’s largest soybean crop ever grown in the United States. The exit of Chinese demand combined with a huge crop continues to put a damper on prices over a year after Chinese tariffs were applied to American soybeans.

Over the last 15 months, soybean prices have been trading without China being in the market for American soybeans. It has been difficult. On the other side of the coin, the trade war between the United States and China has been a gift to the Brazilian soybean industry. This led to premiums for Brazilian soybeans going to China and a further expansion of the industry in Brazil. Argen­tina has also benefited from Chinese interest with a further expansion of their soybean meal market into China. Simply put, without China returning to the American market for soybeans, prices to Canadian farmers and the U.S. will always be compromised. China’s voracious appetite for soybeans needs to return.

North American soybean farmers have responded to this new soybean price reality by reducing acreage. In 2019 American soybean farmers planted 76.7 million acres versus 89.2 million acres of soybeans in 2018. This was a huge reduction partly attributed to the new reality of lower soybean prices. Soybean ending stocks had ballooned to 1.005 billion bushels at the end of the 2018-19 crop year.

These new soybean price fundamentals in 2019 are changing rapidly. However, bearishness in the complex remains. On September 12, the USDA released their latest crop production report. U.S. national soybean production is set to come in at 3.633 million acres based on a yield of 47.9 bushels per acre.

It’s still a big soybean crop, but to put it into perspective, the lower 2019 acres and yield means an automatic decrease in supply by 911 million bushels. Projected ending stocks have decreased from 1.005 billion bushels last year down to 640 million bushels in 2019-20. These are still big numbers weighing on prices, but much less than a year ago.

How might this change? There are a few paths toward higher soybean prices. For the last 15 months, the soybean complex has been adjusting to the exit of the Chinese from the North American soybean market. A new wrinkle in this came in the summer of 2019 with the Chinese exiting the Canadian soybean market as well, partly in retaliation for the arrest of a Huawei executive. This led to widespread retaliation from the Chinese on Canadian canola, pork and soybeans.

At the end of the day, trade peace between the U.S. and China in the form of a trade deal would likely send soybean futures higher. Some type of resolution between China, Canada and the U.S. on the Huawei situation would help too. Simply put, the soybean market has been savaged by this trade dispute. Putting it behind us would provide an avenue for soybean futures prices to rise.

It’s hard to say when any real resolution might come. The Chinese are also dealing with widespread African swine fever, which is causing pork prices to rise greatly. Less pork to feed is a negative for soybean demand.

Planting delays or associated problems in Brazil would also push soybean prices to rise. Chinese action within the global soybean market has worked partly because it was able to satisfy its need for beans from South America. Brazil is projected to produce a record crop of 123 million mt of soybeans this year, with Argentina set to produce 53 million mt. If all goes well there, soybean prices may continue on their current bearish path. However, if there is a production problem in South America, depending on its depth, it could send shockwaves through the soybean market. With Brazil soybean planting ramping up in October, farmers will need to watch for any potential problems along the way.

The Canadian dollar will continue to affect Canadian cash soybean prices. With the Canadian dollar hovering around the 75-76 cents U.S. level, the associated positive basis values put Canadian prices in the $10-$11 cash range. Canadian farmers tend to be flat price cash sellers.

Volatility of the Canadian dollar has a big effect on soybean basis values. Standing marketing orders at flat prices may help limit the risk associated with soybean futures and basis values.

Despite the many issues, the soybean sector will surely be resilient as our Canadian soybean adventure continues. Big crops, trade wars amid growing South American production have battered the market relentlessly. The challenge for Canadian soybean producers is to balance all of these marketing factors into a plan for profitability.

This article was originally published in the October 2019 issue of the Soybean Guide.

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