We get a lot of questions from readers. We get a lot of questions from ag economists.
This week, with news floating out of both Argentina and Europe, the most common one was simple: Which soybeans market is more important right now?
It’s a fair question.
Because traders do have short memories, and they react to data quickly.
But right now, there is no doubt in our minds that Argentina is driving the soybeans market. Recent weather reports have fueled a sharp downturn in expectations for crop production and yields across the soybean-growing provinces.
While the USDA may not be ready to cut its yield expectations, we’ve seen many local analysts downwardly revising expectations.
The delays in planting matched with the La Nina weather pattern have bolstered prices for the last six trading days.
Now, I’m not trying to undercut events happening in Europe. The global agro-economy is interlinked, and one headline tomorrow out of France could change the calculus immensely. The European Parliament’s decision to phase out palm oil from its biofuels output by 2021 is a significant development.
Already, people are speculating that the ban could spread to soyoil and rapeseed oil.
The reality, however, is that soyoil isn’t likely going to replace palm oil in European biofuels.
The Parliament has a futuristic commitment to waste-based fuels that they will embrace today and then likely ban it in the future (this is how they operate; They get all excited about some alternative energy, and then they lose interest or ban it when they don’t find it to be the Holy Grail.)
If you want to understand why Argentina is so important in the soybeans market right now, pay attention to the chatter ahead of the February WASDE report.
In the wheat and corn markets, analysts will speculate on global carryout figures. But in the soybean markets, the focus will be on South America. While Brazil’s wet weather is delaying the harvest, the real news are the burnt leaves and the falling expectations for the Argentine crop.
How opposing Argentine, EU forces are distorting oilseed markets
The EU and Argentina between them are ensuring a stark difference in the performance between soymeal and soyoil futures.
Chicago soymeal futures for March have risen by nearly 4% so far in 2018, including a 0.2% gain to $329.20 a short ton as of 08:45 UK time (02:45 Chicago time) on Friday, thanks to the worries over dryness in Argentina, the top exporter of the feed ingredient.
“Northern Argentina has turned wetter but southern regions are turning drier,” said Benson Quinn Commodities
“With Argentina the number one exporter of soymeal in the world, a smaller soybean crop outlook has supported the US meal market on possible shifting demand.”
Argentina is the biggest exporter too of soyoil, the other main product made when soybeans are crushed.
However, the vegetable oil has far underperformed its fellow processing product, falling by 2.8% so far in 2018 for Chicago’s March contract, despite a 0.3% recovery to 32.32 cents a pound early on Friday.
Soyoil’s declines reflect a number of factors, including US industry crush data for last month which showed far bigger US stocks of the oil than had been expected, and uncertainty over whether US lawmakers will indeed pass a fresh biodiesel tax credit.
However, also looming large has been pressure from prices of rival vegetable oil palm oil, which has suffered from a European Parliament vote to phase it out of European Union biofuels output by 2021.
The ban is expected to result in the loss of some 3.5m tonnes of palm oil, with the EU importing 7.0m-7.5m tonnes of the vegetable oil a year, of which nearly half is used for making biofuel.
(Palm oil is also a popular food ingredient.)
And while in theory the ban could see some of that demand spread to other vegetable oils, such as soyoil or rapeseed oil, there are ideas that broader European scepticism over crop-based biofuels may negate that.
“We understand the vacuum left by palm biodiesel is unlikely to be filled by other food crop biofuels like soy biodiesel or rape biodiesel as the EU wants to promote the growth of sustainable advanced fuels such as waste-based biofuels,” said Maybank Securities.
Soybeans vs rapeseed
With soybeans heavier in meal than oil, for them, the Argentine worries have trumped the concerns over the EU.
And March Chicago soybean futures stood a further 0.3% higher at $9.75 ½ a bushel in early deals, taking headway so far in 2018 to 1.4%.
By contrast in rapeseed, relatively heavy in oil, Paris futures for May have dropped by 1.4% so far this year, albeit with the euro-denominated contract showing a marginal increase once euro strength against the dollar is taken into account.