Soybean Prices to Finally Earn Relief in 2020
In 2019, soybean prices have had one of the more topsy-turvy calendar years of trading in recent trading so just getting into 2020 felt like relief. This was feeling of relief augmented when it was announced in December that the U.S. and China had agreed to terms in Phase One of their trade war deal. While that truce of sorts is going to be signed in a week’s time on January 15th, there’s still plenty of other factors to consider for soybean prices for the rest of 2020.
Soybean Prices Follow Trade War Sentiment
However, it’s no surprise for me to continue talking about the trade war deal with China as it has and will continue to have some of the largest influence on soybean prices. As negotiators barbed back and forth over the last few months, soybean prices have followed rather lockstep, only gaining 25₵ – 30₵ from the start of 4Q2019 through its end. What’s more notable, however, is the rally that soybean prices saw in the month of December, mainly thanks to the announcement of the Phase One deal agreement.
Put bluntly, even though China is agreeing to purchase tens of billions of dollars more of U.S. agricultural products, there’s still the game of tariffs to account for. Unsurprisingly, China was less hesitant to commit on paper to specific dates and volumes of purchasing – namely soybeans – as being handcuffed to that sort of deal would eventually leave them in a bind (i.e. having to buy American soybeans over grossly cheaper Brazilian soybeans).
To be clear, the sensitivity of algo traders (and others) to any change in the trade war sentiment is quite strong. Should we see any headlines about new tensions between Washington and Beijing, or the purchases agreed to by China not actually being met, you should surely expect soybean prices to pull back. After all, there’s a bevy of soybeans still in the market, be it in the United States, Brazil, or even Argentina!
African Swine Fever and Soybean Prices
Undoubtedly, not helping soybean prices sit in a higher trading change in the past years has been the reduced need for soybeans from China as a result of the African Swine Fever spreading. While the Chinese pig herd is slowly being rebuilt, when you have to cull 200M pigs, or more than 50% of the herd in the People’s Republic, that’s a lot less animals needing feedstuffs throughout the day! As mentioned back in December, this has had an impact on all feedstuffs and therefore the hog reduction has bearishly influenced everything from soybean prices to feed barley prices.
That said, while demand for feedstuffs is intuitively smaller, Chinese consumers still want protein, and specifically pork. This has driven up the price of all other protein (i.e. chicken, poultry, beef, and even the prices for eggs!) To alleviate excessive food inflation in the country, China has opened up its doors to more protein/meat imports from the U.S., Canada, Brazil and others. Thus, while the demand for feedstuffs isn’t exactly in China, more protein imports by China means more feedstuffs are needed in those countries where China is increasing said imports from.
The bottom line here is that the spread of the African Swine Fever – not just throughout China but also know around the world – has taken about 50₵ – $1 USD/bushel off soybean prices according to Rabobank.  Between the smaller Chinese pork industry, and the trade war with China generally slowing down shipments, arguably, soybean prices should be closer to $12 USD/bushel instead of the $9.50 handle they’re hovering around. Considering, however, that there’s no real solution to slowing, let alone stopping the spread of the African Swine Fever virus (something I argued all the way back in September 2019), this represents a bearish dynamic for soybean prices for likely years to come!
South America Weighs on Soybean Prices Again
Nonetheless, it’s not a secret whatsoever that China remains the biggest market for soybeans. In 2019/20, the USDA is estimating that the People’s Republic will import 85 MMT, up 3% or about 2.5 MMT more than what was shipped to Chinese ports in 2018/19. With a trade war between the U.S. and China though, it’s opened up a window for South American soybean exporters to capture. This, however, meant giving up some business elsewhere (i.e. Europe) which the likes of the U.S. soybean exporters gladly took over.
Brazilian farmers took the bait are expected to produce a record soybean harvest of 123 MMT, according to the USDA’s December WASDE report. While some dry weather in southern and northeastern Brazil will likely bring this number down a little bit, there’s really no major weather hurdle for soybean prices to bite into.  We know that China has been watching Brazilian crop conditions amidst the trade war negotiations, and ahead of the trade war deal signing next week, they’re buying more Brazilian soybeans!  Keep in mind though that this isn’t unusual, given that Brazil’s soybean harvest is just starting up and fresh supplies are coming to market.
Next door in Argentina, the USDA last estimated that the country will produce 53 MMT of soybeans in 2019/20. That’s technically down 2.3 MMT from the 2018/19 harvest, albeit it’s worth mentioning that the newly elected Argentine government has raised soybean exports taxes one again.  That said, the USDA’s attached in Buenos Aires recently noted that Argentina’s farmers, in anticipation of higher export taxes, set a new record of forward sales as they hoped to lock in soybean prices under the previous export tax rates! 
That said, U.S. soybean exports are doing much better than they were a year ago. With musical chairs games of who trades with who likely slowing down with a trade deal in place with China, the USDA is likely going to have to increase its estimate of U.S. soybean exports. Through Week 16 of the 2019/20 crop year, U.S. soybean exports are tracking 24% higher year-over-year with nearly 20 MMT sailed. Conversely, the USDA is only forecasting a 750,000, or 1.6% improvement year-over-year for a full year estimate of American soybean exports of 48.31 MMT. Something’s has to give here so don’t be surprised if the USDA updates their estimate in this Friday’s January 2020 WASDE report.
Expectations for Canadian 2020 Soybean Prices
Taking a quick look in the north, the 2019 Canadian soybean harvest only produced about 6.05 MMT, down 17% year-over-year and 11% below the five-year average. While both Ontario and Quebec saw their production fall a bit to 3.71 MMT and 1.05 MMT respectively, Manitoba’s soybean harvest of 1.12 MMT was 29% smaller than a year ago.
That said, Canadian soybeans are very much in said game of musical chairs as to where tradeflows are actually moving. That said, after another record year of Canadian soybean exports in 2018/19, shipments are expected to fall as a reflection of the smaller harvest. That said, soybean prices in Ontario were pressured in 2018/19 as more U.S. soybeans were coming across the border. This is evidenced by the record 1.13 MMT of soybean imports made by Canada in 2018/19. 2019/20 Canadian soybean imports are expected to fall back to just 400,000 MT, while exports will pull back to 4.4 MMT, according to Agriculture Canada’s most recent estimate.
One dynamic that might help Canadian soybean prices is the production issues that farmers in Great Lakes states like Michigan, Ohio, and Pennsylvania faced. With yields and corresponding production declining notably, more Ontario or Quebec soybeans could make their way into these areas, where basis levels continue to be relatively attractive. If that materializes, then you’ll likely see soybean prices improve a bit.
Likely a Bullish Year for Soybean Prices
Overall, if 2019 was a resettling of the soybean market, 2020 is going 6o be a year where soybean prices rebuild on fresh fundamental foundations. Yes, there’s certainly a lot of soybeans left in the U.S. and around the world in general, but I continue to be bullish long-term on oilseeds. The trade war deal between the U.S. and China is easily the most important thing for the direction of soybeans prices, but as mentioned, values could easily be swayed by fresh headlines of tensions between Washington and Beijing.
One bearish factor to consider is Plant 2020 acreage in the U.S. Trade war payments have alleviated some impact the cash market, giving rise to the idea that acreage will be strong again this year. To be fair, 2019 soybean acres were pegged at 81M but Prevent Plant acres of 4.5M dropped actual acreage down to 76.5M.  Given the larger amount of corn planted in by U.S. farmers in 2019, from a rotational perspective, soybean acres could see a significant increase year-over-year.  While the first estimate from the USDA pegged 2020 U.S. soybean acres at 84M acres, private estimates today are closer to 86M acres.
While this sets things up for a bearish start to the 2021/22 crop year, I do think that soybean prices have the potential to creep up above $11 USD/bushel in Chicago should there be any weather market in May/June. Put another way, with a trade war deal and soybean exports to China improving a bit, the demand function has improved a bit. The question now, despite 475M bushels – or 12.92 MMT if converting bushels to metric tonnes – still available to start the 2020/21 crop year, is if soybean prices care more about resurgent demand over additional supply.
Good luck out there!
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