The wild ride in soybean markets continues

Most years offer some reasonable pricing opportunities. This winter, they may be difficult to find

From small beginnings in the deep southwest of Ontario, soybeans in 2018 have expanded across Canada in a very big way. In fact, when you commence the drive from Windsor, Ont., soybean fields dominate the landscape along the 401 corridor and into Quebec. It is the same in parts of Manitoba, with smaller acreages dotting Saskatchewan and Alberta. Whether they are processed for animal feed, industrial products or human consumption, soybeans are entrenched in the crop mix of many Canadian farms.

In 2018 the soybean harvest has already started, with a total crop of approximately 6,320,100 acres. Ontario and Quebec represent the lion’s share of this total producing 3,020,000 acres and 915,000 acres, respectively. In 2018, Manitoba planted 1,890,000 acres of soybeans, down from 2,290,000 acres in 2017. Saskatchewan in 2018 had planted acres of 407,500, which is also down from 850,000 in 2017. The Maritime provinces planted 68,800 acres of soybeans in 2018 and Alberta planted 18,300 acres.

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Over the years there has been quite an expansion of soybean acreage into Western Canada. This is likely to continue, but 2018 did see a rollback in this expansion trend. This was largely due to reduced yields in 2017, lower soybean prices and better opportunities with canola. There were also some problems in Western Canada with lower protein content. Needless to say, these problems just represent another challenge to the industry and will surely be addressed in the future. Good soybean weather and better prices will help.

The good weather thing is something that we can’t control even though Canadian soybean producers have employed myriad technology to enhance soybean production. Generally speaking, the weather has been good for soybean production in Eastern Canada in 2018. In Western Canada there have been more issues with drought.

While soybean weather has been good in much of 2018, soybean prices have not been friendly; in fact, prices have descended to their lowest level in nine years. As of September 10, 2018, November futures were $8.49 per bushel. This was down from a spring high of $10.42 on May 29, 2018. In fact, between May 29 and July 13, 2018, the November soybean contract descended to $8.26 per bushel, the lowest in nine years. This precipitous soybean price drop in 2018 was due to two factors, the largest crop ever grown in the United States and the imposition of 25 per cent tariffs on American soybeans imported into China, the largest buyer of U.S. soybeans.

Earlier in 2018 soybean prices had benefited from somebody else’s misfortune. This misfortune took place in Argentina where severe drought cut the country’s soybean production, keeping soybean prices fairly buoyant over winter and early spring. This was followed by the USDA’s announcement that American farmers would plant more soybeans than corn for the first time since 2003. USDA pegged U.S. soybean acreage at 89.6 million acres in 2018, with corn acreage slightly less at 89.1 million acres. The stage was set for a huge crop in 2018.

Soybean plantings went ahead as normal and soybean growing weather was good too. In the August USDA crop report, the USDA predicted a U.S. national soybean yield of 51.6 bushels per acre for a total crop of 4.59 billion bushels, which exceeded all trade expectations at the time. This huge crop also meant that USDA changed expected ending stocks to come in at 785 million bushels, a huge record amount, which weighed on soybean prices.

Big crops always hurt prices regardless of the crop, but this soybean crop in 2018 was also affected in a great way by the action of the United States and China who ramped up a trade war over the summer. The United States imposed steel, aluminum and other assorted tariffs on China and the Chinese responded by imposing some tariffs on American goods, but this included that 25 per cent import tariff on American soybeans. The threat of this caused widespread nervousness in the market and when it actually happened in early July it was devastating to the soybean price. As 2018 grows older this continues to be an anchor on soybean price potential.

The trade war has caused some very strange soybean trade flow. For instance, premiums emerged at Brazilian ports for soybeans after the Chinese announcement. Cash soybean prices have increased in Brazil and decreased in the United States. This has had the effect of encouraging fall planting in Brazil, while encouraging unusual demand for cheaper American soybeans from European sources. For instance, in early September the price for soybeans at Brazil’s ports was $10.31 U.S., while the U.S. Gulf price was a $1.63 less, reflecting an approximate 25 per cent tariff. In fact, with such a difference in price some Brazilians are considering new futures contracts other than the CME to balance off this price risk with China.

How do Canadian soybean farmers make sense of this? How do they adjust their risk management strategies for best price based on this uneven soybean supply and demand situation? It is a difficult situation because the current problem with soybean prices has to do with more than simple supply and demand marketing fundamentals. A trade deal between China and the United States will surely include some type of soybean import provision. However, a trade resolution in the current political environment is almost impossible to imagine. The American government has responded to their soybean producers with “market facilitation payments” of $1.65 per bushel on half their production to ease the pain. However, it would seem nobody is happy in American soybean country and Canadian producers don’t have the same support. It is a very difficult situation.

Canadian soybeans might benefit in some ways, but being priced off U.S. futures makes that difficult. China consumes eight mmt of soybean per month, so with Canadian production at approximately 7.7 mmt annually, we could supply China for approximately 20 days. Illusions of grandeur for Canadian soybeans lay with a trade solution, not substituting for American beans.

At mid-September 2018 Canadian soybean prices were approximately $11 per bushel in southwestern Ontario. Much of this crop headed toward harvest had pricing opportunities in the $12 to $13 range earlier in the year and likely much of it is contracted. However, Canadian soybean farmers need to be vigilant.

The Canadian dollar hovering in the 75 U.S. cent- and 76 U.S. cent-level has been helpful to the soybean basis as it is a direct conversion from U.S. funds. As we look ahead there is also the Brazilian and Argentinian planting season, which will be coming up in October and November. The market will be watching for record Brazilian plantings based on the premiums for Brazilian soybeans into China. All of those factors point to increased Brazilian soybean planting. As Canadians harvest our soybeans none of this bodes well for soybean prices.

However, nothing ever stays the same. It certainly has been a difficult time for Canadian soybean prices under unique and unusual soybean market factors. Markets will adjust and so must Canadian soybean producers. Looking ahead, the USDA will put a final yield on U.S. soybeans in January 2019. By that time Brazilian soybeans will be largely planted and the market will be reflective of that. Hopefully, there will be a trade solution either in the rearview mirror, or much more likely, sometime in the future.

The challenge for Canadian soybean farmers is to measure all of these factors and market their soybeans where they are profitable and comfortable. In 2018, it sure has been a wild ride.

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

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