As we discussed last week in our 2017 soybean market review, the world was dealing with some big crops from both the United States and Brazil.
In 2018, the trend will likely continue as soybeans will likely dethrone corn as the most important cash crop in the United States.
Increasingly, farmers are turning away from corn acreage to plant soybeans and pay the bills. US soybean acreage is poised to hit 90.2 million acres in the year ahead. Is it possible to see US production top 2017/18’s 4.425 billion bushel crop (120.44 MMT) and the average yield of 49.5 per acre, despite the tougher growing conditions?
The primary concern moving forward, however, is whether supply outpaces annual demand.
So where will soybean prices be heading?
That’s the purpose of this assessment of the 2018 soybean market. In the following report, we breakdown the major bullish and bearish factors that will drive soybean prices in the year ahead.
The list of factors includes:
• Chinese soybean demand from the United States and rival export markets
• Global macroeconomic conditions and rising geopolitical instability;
• International crush demand for cooking oils and biofuels
• Weather volatility and the crop sizes in Brazil and Argentina
• When you should be selling soybeans in 2018 (and why!).
Our current soybean factors page on GrainCents features nearly a dozen primary supply and demand factors. However, this report expands on those factors to cover a number typically not explore by mainstream analysts, media outlets, or USDA economists. We’ve expanded this coverage to help our readers get a more complete picture of where prices are heading and when to sell their soybeans.
You can easily read how we view and make sense of the grain markets here.
GrainCents soybean readers also see our sales position for 2017/18 old crop and 2018/19 new crop.
Let’s dig into the details.
2018 Macroeconomic Outlook
Soybean prices enter 2018 on the downswing after a robust U.S. harvest.
Around the globe, economic growth will likely hit levels not seen in more than a decade. In the United States, GDP growth could reach 3%, but such growth likely would not be sustainable beyond this calendar year. A conservative estimate for economic growth falls between 2% and 3%, with low unemployment and a slight increase in wages.
Fresh off its December 2017 interest rate hike, the Federal Reserve will continue to wade into uncharted waters as it begins the tapering of its $4.5 trillion balance sheet.
Under the new leadership of Jerome Powell, the central bank is expected to raise interest rates several times again this year. However, the Fed won’t make too many moves if concerns about weak inflation sustain well into the year. Rate hikes would have a strengthening effect on the U.S. dollar and would make American commodity exports less competitive against other international suppliers.
On the energy front, oil prices kicked off 2018 at their highest levels in three years.
Despite falling production costs and increased output across North America, it appears that the world’s largest oil cartel (OPEC) has succeeding in improving the global supply and demand balance. OPEC and several other major oil producers agreed last year to extend a deal to cap excessive oil production through the end of the year.
While the rise of U.S. production – currently at its highest levels since the 1970s – continues to cap the potential upside of crude prices, we anticipate that biofuel production will remain robust in the year ahead.
As we kick off the new year, this in-depth assessment of the 2018 soybean market offers our proprietary views on critical factors.
Here is what you need to know to plan your 2018 marketing year and get the best price possible for your soybeans.
BULLISH SOYBEAN FACTORS FOR 2018
La Nina’s Impact on South America
In conversations with meteorologists and having read everything I can by agricultural analysts around the globe, the sentiment on La Nina is as follows:
We can anticipate a significant amount of weather pressure on crop conditions from late November to the end of February. From there, the expectation is that La Nina will slowly abate as the spring months accelerate.
With that in mind, we’ve watched soybean trading in the first week of January 2018 to center on the impact of dryness across South American producing regions.
Dry weather has delayed soybean planting in Argentina to levels never seen before. During the first week of January, planting covered just 72% of the planned 44.7 million acres in Argentina.
With the probability of a La Nina event sitting at 75%, analysts are projecting price volatility in corn, soybean, wheat, and palm oil markets.
The last La Nina pattern fell in 2011-2012. Significant drought pushed grain prices around the globe much higher. That said, with the world awash in soybeans, it would take a very significant La Nina event to push crop prices back to 2011-12 levels.
Right now, the USDA forecasts a small reduction in Argentine soybean production. The agency projects that total output will fall from 57.8 million metric tonnes to 57.0 MMT. The USDA projects that yields will fall from 46.8 bushels per acre last year to 444.3 bushels in 2017/18. However, harvested acres is projected by the USDA to increase by 4% to 47.2 million.
However, we anticipate that delays or abandonment of planting could fuel a sharp decline in current acreage estimates in Argentina.
Brazil was also slated for an increase3.2% increase in soybean acreage in 2017/18 – the 11th straight year of area increase for the oilseed. However, the USDA forecasted that soybean production would slide from last year’s record crop on more average yields. This year, Brazilian soybean output is projected to fall from 114.1 MMT to 108MMT (albeit many private estimates in Brazil are above 110 million tonnes)
Regardless, Brazilian soybean yields are expected to pull back from the record 51.9 bushels per acre last year to 45.9 in 2017/18. That is more aligned with the five-year average of 45.4.
The Brazilian soybean harvest is already underway and will continue through the end of February.
We’ve noted in the past how the most bullish thing about soybeans is actually Brazil, since they are the only major exporter on the global stage other than the United States. A production slip there could easily provide the catalyst for a lengthy price rally.
Should there be increased evidence that drought conditions are expanding in Northern Argentina and southern Brazil, there could easily be huge one- to two-day jumps in prices that farmers here in North America will want to take advantage of.
We’ll be advising readers to move their crop as these opportunities arise.
Increased Chinese Import Demand
Chinese import demand will reach a staggering 97 million metric tonnes this year, according to the USDA. That’s a 3.7% jump from the previous crop year, and 15% better than the five-year average.
It’s also the 16th straight year of increases in soybean imports.
The uptick in imports is part of the broader surge in Chinese livestock demand across the nation. The dietary transition of consumers to purchase more beef, pork, and poultry has fueled a significant expansion in the nation’s production.
Last summer, China’s Ministry of Agriculture released an opinion paper calling for the accelerated development of animal husbandry in its Northeastern regions. This paper calls for greater development of both livestock breeding operations and domestic feed industries.
The USDA FAS noted in October 2017 that Chinese hog producers began a massive period of expansion last year that is expected to increase through the end of the year. After two years of weak production, the nation’s hog industry experienced a wave of consolidation. The emergence of fewer, larger producers enabled them to scale up output and drive greater efficiencies.
For example, Guangdong Wen’s Foodstuff Group, a major producer plans to expand its hog herd from 17 million this year to 27.5 million in 2019.
Chinese pork production is slated to increase from 53.5 million metric tonnes in 2017 to 54.75 million metric tonnes this year. This figure is the largest since 2015. China’s pork imports are slated to decline from 1.65 million MT to 1.60 MMT this year.
Meanwhile, Chinese beef and veal production are expected to expand, according to the USDA. The agency projected that Chinese production will increase from 7.07 million MT to 7.11 MMT.
Rising Crush and Biodiesel Demand
The USDA forecasts that 1.94 billion bushels will be used for the annual soybean crush.
Rising biodiesel demand will help offset concerns about flat or declining demand in soybean oil consumption in food as alternatives like canola oil and palm oil gain market share.
Specifically, as 2017 wound down, the International Trade Commission called foul on Argentina and Indonesia over subsidized biodiesel exports and the impact on the U.S. industry.
The rulings show that we will see countervailing duties on these nation’s biodiesel imports for at least the next five years.
As a result, U.S. imports of Argentina biofuels have plunged. This comes at a time that U.S. biodiesel production is on the rise and is hovering at record levels.
The five-year window creates remarkable demand for U.S.-sourced soybean oil and greatly benefits all players in the domestic biodiesel value chain.
This makes us continuously optimistic about the domestic demand side of the balance sheet.
The only logical restraint though is capacity and movement of supply from farm to crusher. We already know that NOPA has stated that American soybean crush capacity will need to expand by 20% over the next 10 years to keep up with demand.
However, we would argue that with the new import taxes on Argentine and Indonesia biodiesel, it might be needed in the next 5 years.
BEARISH FACTORS FOR 2018
Brazilian Export Competition
The world is awash in soybeans. The U.S. is expected to hit a fifth straight year of new record exports of soybeans.
However, the optimism this year isn’t so palpable as 2018 begins.
Why did the USDA slash its U.S. export forecast by 25 million bushels in December?
U.S. export numbers were cut to 2.225 billion bushels thanks to a lag in sales commitments and exports. Competition is cutting into market share.
So, who is selling crop and where?
Brazil’s record crop in the previous year is now creating a number of price pressures for American suppliers. Even though Brazil is poised to see a 6.1-million-tonne decline in production from last year, it will still produce 108.0 million tonnes according to the USDA. Last year’s crop was a record, after all.
However, more private estimates are pegging the Brazilian soybean crop – which is currently in the middle of its growing season and will see harvest hit full speed by late January – is above 110 million tonnes.
On the export side, in the December WASDE, the USDA increased Brazilian export figures by 500,000 MT to 65.5 MMT thanks to higher fall-quarter shipments. Thus, this is the 7th straight year that Brazil’s soybean exports will reach a new record.
The USDA also raised Argentine soybeans exports – an uptick from 7 MMT last year to 8.5 MMT this year, a gain of 21%
Brazil will retain its title as top soybean exporter in 2017, with China doing more soybean business on the southern side of the equator.
While we’ve said that Brazil can be the most bullish thing about soybeans, it can easily be the most bearish.
Chinese Production and Stocks
China is the world’s largest importer and the fourth-largest producer of soybeans.
Given that the country already has significant corn reserves in its own backyard, China realized that the world is awash in corn and decided to pull back from its massive production. Chinese soybeans production is expected to increase from 12.9 MMT to 14.2 MTT, according to the USDA.
It’s easy to think that ChemChina’s purchase of Syngenta in 2017 is part of a boarder plan to bring about stronger seed genetics (and innovation) and bigger food production in the People’s Republic.
What we do know that China is seemingly starting to stockpile soybeans. Of course, they’re the largest consumer of beans in the world, but it’s expected that they’ll end the 2017/18 crop year with 20.6 million tonnes still left over.
While it’s only a slight increase year-over-year, it is a new record, and 16% bigger than the five-year average.
We also know the China’s government have start to pull back their incentives for corn production, and instead pushing more money into soybean production.
While by no means is China going to be reach the heights of the top three producers – United States, Brazil, and Argentina – but they could see acres and yields creep up. After all, over the last ten years, average soybean yields have stayed consistently around 26 bushels per acre, literally half of what we’re seeing these days from American and Brazilian farmers.
Rising Global Acreage Expectations
Around the globe, 2017/18 soybean harvested acres will increase by 5.1% to 312.5 million acres, according to projections from the USDA.
Where it’s coming from though is more surprising.
The agency projects noticeable gains out of China (+9% year-over-year), the United States (+8%), and even Ukraine (+8%).
More surprising is the likes of Canada and Russia.
While Russia is far and away the world’s Wheat King right now, we’ve noted how soybean production there is booming. Harvested acres in Russia in 2017/18 hit 6.2 million, the fourth straight year of a new record for Putin and his farmers.
However, average yields this past year were 36th in the world at 20.8 bushels per acre. This mean that production did hit a fourth straight record of 3.5 million tonnes.
In Canada, planted acres hit a record 7.28 million in 2017/18, according to the Canadian farm ministry. That’s a ridiculous jump of 32% year-over-year and 44% higher than the five-year average. As such, Ag Canada says that soybean production in the Great White North hit a record 7.72 million tonnes (the USDA’s estimate is 8 million tonnes).
With such large production, Canadian soybean exports are increasing too: a record 5.6 million tonnes is expected to get shipped out this according to Ag Canada (the USDA is forecasting a record too, just a bit smaller though at 5.5 million tonnes).
Who is Canada exporting soybeans to? Historically, it’s been the European Union. China has been taking more though. Last year in 2016/17, China bought a record 1.85 million tonnes or Canadian soybeans – or 42% of total exports.
As a side note, Canadian soybean exports thus far in the 2017/18 crop year are tracking 5% below last year’s pace with 2.71 million tonnes sailed thus far. What’s clear though, is Canadian soybeans are heare to stay. A few years ago, we were talking about corn making its way north into Western Canada, it’s actually soybeans that are finding better roots (pun intended).
Ultimately, we can easily argue that Brazil is taking more Chinese soybean business away from the United States. However, there’s an emerging trend that countries like Canada and Russia have the ability to grow large soybean crops and have the adequate transportation networks to compete with the likes of Brazil and America.
While it’s not necessarily a ton of tonnage, a few million tonnes here and there that doesn’t go to the U.S. is not healthy for exports.
After knowing this, is it really a surprise that American soybean exports are tracking 14% below last year’s pace? Just 28.4 million tonnes of 2017/18 US soybeans have sailed through the end of December, versus 33.1 million a year ago.
NEUTRAL/NOISE FACTORS FOR 2018
The international equity and commodity markets withstood a string of geopolitical threats throughout 2017.
This year, in 2018, will also feature a lot of headlines ranging from North Korea’s nuclear weapons program to civil unrest in Iran.
We’ll read more catchy articles on CNN about the United Kingdom’s pending departure from the European Union, government corruption from Brazil to central Africa, border conflict between China and India, and the South China Sea.
Most geopolitical headlines are mostly noise though – media outlets looking for eyeballs in order to sell ads. We have to focus our attention on events that could have a pronounced impact on trade.
Looking into the year ahead, grain prices likely won’t experience price shifts similar to those in the precious metal or energy commodity markets when these stories emerge.
Soybeans, however, are susceptible to swings in the event that trade relations sour between China and the United States, given the latter’s reliance on the former as a major customer. We already know that China is starting to put quality controls on soybean imports from America (more on this later).
We need to focus on issues centered on global trade, the rise of protectionism inside U.S. borders, and potential currency manipulation by China or currency depreciation in struggling grain producing nations.
U.S. Trade Policy
President Donald Trump road into the White House in 2016 with a strong protectionist message that has raised concerns among global free-trade advocates.
He shook his finger at Chinese currency manipulation, said that NAFTA was a raw deal for American workers, and pulled the United States out of the Transpacific Partnership (TPP).
The TPP decision has already increased concerns about U.S. corn and wheat sales with traditional trade partners like Japan and the Philippines. Trump’s call to renegotiate NAFTA has propelled Mexican corn buyers to seek imports from South America.
In the soybean complex, the question is how Trump will handle his tone on China in the year ahead.
A trade war between the two nations never materialized in 2017. However, real geopolitical tension surrounding the South China Sea, accusations of currency manipulation, and military tensions could emerge at any time. The challenge is to separate the signal from the noise.
Many have compared the economic rivalry between the U.S. and Japan during the 1980s to the current rivalry between the U.S. and China.
There is one serious problem with this comparison.
The United States and China do not share a defense partnership in any capacity, meaning that economic cooperation can easily be undermined by military tension.
Chinese Quality Protocols
The Chinese government has asked, and the U.S. government responded.
The USDA has set a quality standard on soybean shipments heading to China. Priority for soybean shipments will now be given to cargoes with impurity levels below 1 percent. That figure half from the previous threshold and comes at the request of the Chinese government.
Back on December 15, China’s quarantine authorities destroyed about 6.8 million metric tonnes of U.S. soybeans over mildew problems.
The country also found that shipments from eastern ports had far worse impurity problems than ones from the west coast. U.S. exporters can’t say ignore this.
China buys at least one-third of the American crop. The alarming news is that roughly half of U.S. soybean export shipments last year had impurities above 1%.
Right now, it is expected that U.S. exporters will have to pay for additional cleaning and buyers will be pressed for better quality to meet quotas. There is also expectations that it will put a lot of pressure down the supply chain on farmers. As a result, quality is going to be king.
Early on, this could produce a series of bottlenecks in the supply chain. We’ve already noted some of the
But over time, it is fair to estimate that best practices will ensure higher quality shipments. In the short term, it could be bearish, but quicker adoption of quality assurance processes can bolster the repultation and demand of U.S. soybeans.
Right now, it’s best to classify this as noise until we have more time to assess the situation.
Yield Volatility and Soybean Production Forecasts
In the months ahead, farmers will face a barrage of predictions, projections, prognostications, forecasts, bold calls, and educated guesses. Call them what you want, but remember that it is very difficult to understand the
During the annual Farm Journal Crop Tour, FarmLead’s Doug Kirk summed up the entire assessment of U.S. crop production in one term: Variability.
From county to county and state to state, yields varied tremendously. Whether the weather or whether the production practices, this variability in yields has become a source of frustration for readers of the USDA monthly WASDE reports.
Farmers know what is in their backyards or in their neighbors’ bins. Tracking the yield estimates in a state – let alone country – can be infuriating though. While your crop might come in at 40 bushels per acre, the USDA might be forecasting 50 bushels on average due to states that don’t produce a significant amount of the crop.
Not only is this frustration felt by farmers, but it is also evident in the trade estimates ahead of each report.
Moving forward, we want to focus on what we can control.
Some months trade estimates will be higher, other months will be lower than USDA figures.
By knowing how to trade based on the data report and the variance in estimates, we can maximize profitability rather than spend our days huffing about the USDA’s shaky methodology.
When Should You Sell Soybeans and At What Price?
In 2017, we saw the best opportunities to sell soybeans in January, March, June, and July. But this is just from a calendar perspective.
From a crop year perspective, we were selling 2017/18 crop all the way back in November 2016 (10%) through to July 2017.
We then made another 20% sale in January, 10% sale in March 2017, and the two more blocks of 10% in late May and July.
With those contracts now filled, we’re looking at new demand and weather premium opportunities to sell off.
South America presents the obvious option. After all, the risk of a smaller soybean crop south of the equator helped create those sales opportunities in November 2016, January 2017, and March 2017!
More concretely, sales thanks to South American weather premium are likely to happen in the next 4 – 8 weeks. We’ll be selling both 2017/18 old and 2018/19 new crop here.
Both our old and new crop sales likely need to be at levels where the futures market is above $10 USD / bushel, if not higher.
For perspective, May 2018 futures prices are sitting at $9.82, July 2018 prices are at $9.91, and August 2018 prices are at $9.93.
New crop, 2018/19 futures prices are at $9.85 / bushel on the November 2018 contract and $9.93 for the January 2019 contract.
After that, we’ll likely see some bearish pressures that discuss the record 2018 acres expected across North America. As discussed though previously, dryness remains a concern across many areas of Western Canada and the Northern Plains and could easily bring another sale.
Thereafter, it’s about getting the crop in the bin. Overall though, we could be anywhere from 25-50% sold on 2018/19 new crop by the time the combines start to roll. The only reason we were 60% sold on 2017/18 crop before the harvest started was price premiums were too strong to ignore.
We’ll be also watching for new crop basis opportunities to take advantage of. Just make sure you understand the type of basis contract you’re getting into – we have a few resources you can read – through here in understanding the difference between default or currency-derived basis.
Again, we’re cognizant of the strong demand factors in soybeans. But soybeans around the world are appearing faster than they can disappear.
Right now here our expectations for specific futures levels to get hit on the March 2018 front-month contract before the end of February 2018 (all prices listed in USD / bushel, as on the Chicago Board of Trade)
• $9.80 – 99% (you’ll never hear us “it’s a guarantee”. That’s just bad risk management)
• $9.90 – 90%
• $10.00– 80%
• $10.10 – 55%
• $10.20 – 30%
• $10.30 – 10%
As we move past the March contract and into the spring seeding frenzy, we’ll look to update our price expectations.