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Dr. Ken Rietz |
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Soybeans are the second most exported crop in the world (corn is first). That means that the global soybean harvests form an important part of the global food chain. A CME group white paper, written by AgResources with offices in the US and Brazil, pointed out several items about soybeans that I term signposts. By signposts, I mean a set of circumstances, which indicate what direction the soybean market is being pressured to take. I will bring up each of these signposts and provide a perspective on it. My comments provide supplementary material rather than echoing the paper; I strongly recommend reading the CME white paper for more information. But first, here is a combined graph with both weekly price and export size for soybeans from the US. |
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Figure 1: CBOT weekly price of soybean futures in USD per bushel, and weekly amount of soybean exports, in millions (M) of bushels Notice the pattern in the graph. Once soybean prices get higher, the peaks in soybean prices correspond to the lows of export volume, and the lows in soybean prices correspond to the peaks of export volume. Just what you would expect. The first signpost is the size of the Brazilian soybean harvest in 2024. Brazil is the world’s largest exporter of soybeans, dwarfing all other countries except the US. However, the estimates for the crop size are hard to pin down. CONAB, roughly the Brazilian equivalent of the USDA, thinks Brazil will produce 147.7 million tons of soybeans. The USDA, in the WASDE, thinks Brazil will produce 154 million tons. Those are the two major acknowledged sources of information on Brazilian crops, but lately they have generated increasingly divergent estimates for soybeans, for reasons that are difficult to fathom. The markets are treating the CONAB number as the more accurate. Once the size of Brazil’s harvest is known (not until early 2025), then the number of soybeans exported can estimated. The second signpost is the amount of US soybean oil that will need to be used for biodiesel, which is mainly relevant to the US. Soybean oil is a cheaper drop-in replacement for Ultra-Low Sulfur Diesel (often called ULSD) derived from crude oil. Various states on both coasts of the US give tax incentives for biodiesel. (It is worth noting that the ethanol that is mixed with gasoline comes from corn, not from soybeans.) Despite the support of the “green movement” soybean oil has not been a major player by itself. Used cooking oil, which is even cheaper than straight soybean oil, has been taking a much larger part lately. This complicates the estimation of how much soybean oil will be needed. The third signpost is global politics. The largest importer of soybeans is China, far ahead of any other country. Deciphering the attitudes of China is not always simple. For example, this year, China has not ordered any soybeans from the US so far this year. They seem to be intending to use US soybeans only as a last resort. If that is the case, virtually all of Brazil’s exportable soybeans will be taken, and the number of exported soybeans to China from the US will be left dangling until the end of the soybean season. And as I indicated in a previous commentary, China is moving to apply genetic engineering to crops, including soybeans, to increase the amount of them that are grown for themselves. This signpost is probably the most difficult to apply. The fourth signpost is the growth of next year’s Brazilian soybean crop. Soybeans are typically the main crop grown in Brazil as well as its largest export. There is a rhythmic alternation between Brazil and the US because of the northern and southern hemispheres. The results of one year’s crops are closely monitored by the other country and affect how much acreage to devote to soybeans (or corn, the main alternative to soybeans in the US). Lately, the weather in Brazil has been problematic for soybeans. If conditions improve, and the next signpost will deal with that, then Brazil would be able to provide nearly all of China’s soybean import needs for soybeans. Combine that with China’s hesitancy to import from the US, and a significant shift in US crop composition could be right around the corner. The fifth, and final, signpost is the effect of La Niña on Argentina’s soybean crop. here is a pattern to El Niño and La Niña. Each follows the other, with a neutral period in between. The Hightower Report, in its May 31, 2024, issue, covered the intricacies of ENSO (El Niño Southern Oscillation). We are currently in a strong El Niño. That raises a question: How is the strength of an El Niño measured? For that, we need to know a bit about the definition of an El Niño. Both El Niño and La Niña are determined by the 3-month average of the surface temperatures of the waters in a specific region of the east central Pacific Ocean. The difference between the average temperature and the typical temperature determines the strength of El Niño or La Niña. A difference of 0.5 degrees Celsius is enough to declare an El Niño event. The difference for the current El Niño was 2.0 degrees, not a record but well above the threshold of 1.5 degrees for a strong El Niño. For the 3-month average from February 2024 to April 2024, the difference was 1.1 degrees (indicating a moderate El Niño), and the latest weekly difference was only 0.2 degrees, giving hope that this El Niño is ending. The US Climate Prediction Center (CPC) has called for this El Niño to transition to neutral in June. The length of the neutral phase is hard to predict. The CPC predicts that La Niña will develop by the end of August at 49% and by the end of September at 69%. A La Niña happens when the difference turns negative, but the sizes are comparable. What happens then? With La Niña in the US, expect above average rainfall for the eastern Corn Belt, and above average temperatures in the southwest. In Brazil’s and Argentina’s soybean growing regions, expect below normal rainfall. Even mild drought in Argentina seriously affects their export of soybean meal, and they are the global leader supplying that. A reduction in Argentinian soybean meal will put pressure on Brazil’s soybean crop. In summary, the variety of factors that affect the price of soybeans can be overwhelming, and the randomness of those factors makes it even harder. But these signposts help to sort out what to pay attention to, and what to set aside. The main tension is the weather versus Chinese trading strategy. The factors to combine are
The net result should be comparable prices for the next year, possibly dropping a bit. |