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Soybean Guide: When a supply interruption eventually comes, which it will, soybean prices will have to go up to ration demand

Driving through Eastern Canada this summer, you could see the crop everywhere. Fields of soybeans stretched from Windsor, Ont. into Quebec and beyond into New Brunswick and Prince Edward Island. And that’s without even mentioning the West.

Soybeans have truly transformed the farm landscape over the last several decades. They have become an integral part of the farm income picture in Canada.

Of course, though, for farmers the challenge is managing our soybeans efficiently and marketing our soybeans profitably.

In 2015, according to Statistics Canada, eastern Canadian soybean acres have actually dropped from record 2014 levels. For instance, in Quebec in 2015, harvested acres are expected to end up at 775,900, down from the 852,500 acres in 2014. In Ontario, meanwhile, StatsCan’s estimates show 2.92 million acres of soybeans at harvest versus 3.06 million acres in 2014.

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Changing market dynamics as well as rotational concerns and the lack of wheat acreage in Ontario in 2015 surely had an impact on soybean acres, and in 2016, this fluid acreage consideration is likely to continue.

It is one thing to grow soybeans and another to market them profitably. In Eastern Canada, soybeans are crushed at domestic crushers both in Ontario and Quebec, but the crop also moves throughout the year into export markets. Typically, in Ontario at harvest time, soybeans move out of province partly because of our lack of storage as well as market opportunity.

With Quebec’s closeness to saltwater, soybeans can quickly move into export markets. However, there is also an active livestock market which can use soybean meal, with the result that there is a dynamic market environment where soybeans move to where they are needed.

That said, further domestic processing within Ontario and Quebec would certainly be helpful for value-added opportunities for eastern Canadian farmers.

Within the soybean market in Eastern Canada, there are both non-GMO food-grade soybeans and GM soybeans grown side by side but with dif-ferent market opportunities. For the most part, non-GMO food-grade soybeans are processed and put into containers and exported to markets in the Far East. In East Asia, people sit down every day to eat some type of soybean product. This demand reaches back into Canada, where processors and farmers have been able to satisfy that demand in an efficient manner. Premiums above posted cash prices for soybeans are constantly in flux, but remain a real part of the soybean economy within Eastern Canada.

Of course, Canadian soybeans are not marketed in a pricing vacuum. Each end-user calculates the price of soybeans based on a nearby futures price determined at the Chicago Mercantile exchange plus or minus a specific basis value, which reflects localized demand. In 2015, we have seen a major decrease in the futures price for soybeans as the USDA has predicted a very strong crop yield for 2015.

For instance, the August 12 USDA report said 84.3 million acres of soybeans were planted in the United States in 2015. It also projected a yield of 46.9 bushels per acre for a total crop of 3.916 billion bushels.

This fall’s huge projection from the USDA were somewhat different from what the trade had been expecting after difficult early-spring weather in the eastern Corn Belt. Soybean futures decreased substantially on this news and have retreated more than $1 below September 2014 values.

These lower futures prices have certainly put a bearish tone on the soybean market. However, to a great extent Can-adian producers have been shielded from even greater price drops because of the precipitous drop in the Canadian dollar over 2014 and 2015. The cash price for Canadian farmers is the nearby futures price plus or minus the basis in Canadian dollar terms. With the Canadian dollar reaching down into the US$.75 range in early September 2015, this has meant cash prices of approximately C$11 a bushel as of early September. In other words, the lower Canadian dollar has led to a +$2 Canadian basis value mitigating the drop in futures prices. In many ways, despite the price drop in soybean futures, the precipitous drop in the value of the Canadian dollar has been “the story” in the Canadian soybean market in 2015.

The value of the Canadian dollar is a reflection of the demand for Canadian currency. In many ways, it is an inverse to the value of the U.S. dollar, which has been higher into 2015. With the Bank of Canada cutting interest rates and our economy slowing, it has caused our Canadian dollar to drop, giving a boost to our grain basis values. China, which is also a large buyer of Canadian commodities, has also seen a slowing of its economy in 2015 further pressuring our Canadian currency.

With the Chinese economy slowing in 2015, this has had a negative effect on soybean prices, as China is the largest importer of soybeans in the world. However, to some extent the futures market has been “chasing these headlines” and anything negative to do with China often is negative for commodity prices. Food demand is not the same thing as manufacturing activity and it is likely to remain robust and actively growing.

China has purchased so many Brazil-ian soybeans this past year that the USDA actually reduced Brazilian soybean ending stocks to just 128 million bushels for 2014-15. So despite problems with the Chinese economy, it is expected the Chinese demand for soybeans will remain robust.

Livestock production in China continues to expand and protein demand for both swine and poultry is going up too. Big crops in both North and South America have satisfied this demand, but when the supply interruption eventually comes, which it will, demand will not be easily tempered. Soybean prices will have to go up to ration this demand.

For Canadian soybean producers, there is much to measure with regard to market factors looking ahead for our soybeans. What will the Canadian dollar do in the next several months? Essentially, this is another layer to Canadian soybean marketing as large movements in the Canadian dollar can cause large cash price movements.

Will the USDA increase its August projection, putting even more pressure on the futures price for soybeans? Or will it reduce its estimate?

As Canadian soybean farmers, how do we find that sweet spot for marketing our soybeans with a low Canadian dollar and a higher futures price?

We also have to ask, how will South American planting affect prices? How much will it put in the ground, what will its weather outlook be, and how will this affect soybean futures?

No discussion about world soybean prices can take place without looking at the South American situation.

The USDA in its latest report is predicting that Brazil will harvest 97 MMT of soybeans in 2016 and Argentina will maintain its soybean production in 2016 at 57 MMT.

The Brazilian number continues to increase every year, Argentina not so much, since export taxes and political issues there have stemmed production in the short term. However, the important consideration for Canadian farmers to be aware of is their planting time, which takes place between October and Decem-ber 2015 and their harvest between March and May 2016. Any weather anomalies affecting this planting or harvest period will affect futures prices greatly. Daily market intelligence will be key.

USDA reports will remain flashpoints for soybean market action moving ahead. The final USDA report on the size of the 2015 soybean crop will be published in early January 2016 and often produces explosive price movement.

Much of the price action until then will be reflected in actual yields when combines roll as well as the interest of investment funds in our soybean market, which have exited to a large extent since July 2015.

It has been a long way down from the record soybean futures price of $17.89 a bushel achieved in 2012. In effect, current futures prices reflect less than half that.

Of course the test for Canadian producers is to measure all the market factors that affect both the futures price and our Canadian dollar value as we move ahead.

Managing both of these soybean-marketing layers presents us a unique challenge. Rewards for our management can be substantial.

This article first appeared in the October 2015 issue of the Soybean Guide.

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