As promised, this week we are going to take a look at what is happening in soybeans from an overall supply and demand standpoint and what that may mean for price in the coming months.
When looking at the global supply and demand outlook for soybeans, it is easy to see why so many people are incredibly bearish. The stark contrast of 132 mmt worth of world carryout expected this year against last year’s 112 mmt is hard to ignore. According to USDA projections, we will have 710 million bushels of additional supply to chew through this year, something that is no small feat.
However, when digging further into the potential changes in both supply and demand not yet accounted for in the USDA’s outlooks, and taking into consideration the supply and demand developments happening in other vegetable oils around the world, I am not sure we can say the current market set up is as bearish as many people want to claim.
Domestic Numbers
We will not get an updated production figure in this month’s WASDE report, with the USDA opting instead to use the December 1st stock figures they are gathering this month as a reconciliation, releasing those updated production figures in January.
In November, the USDA opted to trim their production outlook, backing away from their record yield projected in October, and taking yield down 1.4 bushels to the acre. This reduction had surprised many traders, though for anyone at the ground level, it was not a shock. The dry finish to the season set records across the Corn Belt, cutting into production expectations from the start of harvest to the end in a big way.
Talking to crop insurance agents and merchandisers in many places paints a picture of a good crop, but nowhere near the crop that had been anticipated, opening the door to another yield reduction in January. In soybeans, even a half bushel per acre can make a splash, taking 43 million bushels off the production outlook, while a full bushel would take just over 86 million.
With the cash market standing strong throughout much of a nearly record fast harvest, and with spreads and basis remaining stout still, I would say the signs are there another cut to production could be due.
On the demand side, it is likely the USDA could be underestimating crush and exports as well, after making what I would assume to be a Trump-win driven decision to trim usage in last month’s report. When talking to officials at the USDA, it is clear they tend to use history as a guide when building out usage projections—making the trims to demand driven by a Trump win not necessarily surprising, though perhaps unnecessary.
Yes, tremendous confusion still remains when it comes to what type of tax credits or government support the country’s biofuel industry will see if we do not get guidance from the Biden administration on 45z or the biofuel blenders credit does not get extended. Many analysts believe we could see a sharp drop in soybean oil demand for biofuels if renewable diesel or biodiesel plants were to slow due to poor margins, something that is reportedly keeping physical buyers in the domestic market on the sidelines.
This lack of domestic buying interest in soybean oil has allowed for the world buyer to come to the US in a big way, with the book already nearly double the USDA’s export sales expectations for the year, just two months in. Many like to say we will need to dump the soy oil somewhere as domestic demand will be non-existent without the fuel credits, something I find difficult to believe for one. In addition, there has been talk recently in the industry that a solution is in the works, and that it will be one the industry will be ‘pleased with.’
With crush demand the first few months of the year already steadily outpacing what the USDA needs to meet projections by about 10 million bushels each month, it is likely we could see a bump in crush demand in upcoming reports. Obviously, clarity with domestic biofuel support is huge, but with the export demand for oil helping to fill the gap, it is likely margins will remain supported well enough to keep plants running relatively strong.
In beans when it comes to crush, the market seems to be pricing in an uncertain demand outlook, something that is understandable but something that could also be really dangerous for physical and speculative shorts if we were to get an extension of 40a or clarity on 45z.
On the export demand side of the ledger, export sales have grown well beyond the pace seen a year ago, with a growth in world demand outside of China for US soybeans seen. While Brazil works to supply Chinese buyers, sustainability rules and availability allow for growth in new export markets that continue to benefit US exporters. On the China side, we are seeing an uptick in recent buying by government entities, with reports Sinograin is looking to continue booking US soybeans through April due to their ability to store better.
The million dollar question of course remains regarding US export demand and what our trade relationship will look like with China under Trump but again, that may not be as bearish as folks want to paint it. The Biden administration just recently rolled out another round of significant export controls, stating they want to limit Beijing’s semiconductor or chip industries due to their use in military expansion. China responded by restricting their exports of minerals to the US, with a whole host of other actions threatened.
Whether the Trump administration uses the removal of these restrictions as a negotiation tactic with a push to revive Phase One remains to be seen, though insiders say it is very possible.
In the end, it is very likely we could see the US carryout shrink further, with it not out of line to say we could see another 100 million or more trimmed as we work into the New Year. Now, while obviously carryout falling back to levels just slightly above those seen this past year is not bullish in the least, it does remove some of that much discussed growth in world supplies.
Global Demand
While the growth in global oilseed supply is easy to see, with Brazil alone looking to add 15 mmt or more—over a half a billion bushel--to their overall production this year versus last, the growth in world vegetable oil demand remains far more difficult to quantify.
Growth for biofuels seems to be a moving target, with many warning that it can disappear just as quickly as it shows, which is true to a certain extent. However, once you take a percentage of a world’s crude or energy demand and replace it, you’re not likely to see a reversion back to crude or a less carbon friendly energy source. For many developing nations, the lowest hanging fruit for meeting climate agreements is to replace coal, crude or some other type of ‘dirtier’ energy with biofuels.
I would venture right now that so many people are so caught up in what is taking place when it comes to limiting the growth of the US biofuel industry, they are missing the massive leaps happening elsewhere. And while market bears want to claim things like Indonesia moving to B40 is impossible, it is not going to stop the government from pushing for its implementation and working to maximize the domestic demand of palm oil to whatever level that may be. Meanwhile places like India are working to figure out all of the ways they can replace dirty fuel stocks with ethanol and other renewables.
It's not just India or Indonesia, we are seeing tremendous growth for biofuels in Brazil, Argentina and the EU.
And while sustainable airline fuel may be struggling to gain traction in the US, China has a desire to be the world’s largest producer, choosing to use soybean oil and used cooking oil as the foundation of their SAF production.
Basically, it feels as though there is a whole host of demand being built via biofuels that remains difficult to quantify but feels as though once it is here, it will be somewhat inelastic.
What it all Means
In the end, to be completely honest, I would be lying to you if I said I had a good feel for where beans need to go next price-wise, but I’m definitely not convinced they need to break to new lows just yet. With most of the more bearish factors already well known by the market and the lower end of the range managing to hold, I’m not sure we necessarily need to revisit trade war lows.
China’s delivery of consumer stimulus will likely have a lot to say about what their demand will look like in the year ahead, with talk they will look to do whatever it takes to stabilize their property values and markets. How Trump tackles trade will obviously matter as well, with thoughts that we could see both countries revisit Phase One as a starting point.
In addition, we must continue to watch what is happening in Brazil’s economy as inflation has spiked and their currency has traded to multiyear lows. Farmer selling has been reasonable up until recently, with the selling of soybeans slowing slightly. We have seen the effect of farmers holding onto supplies as a hedge against inflation in Argentina over the years, and we must remain aware that is something that could impact Brazil potentially in the years ahead.
Overall, the recent range bound trade that we’ve seen makes sense—we don’t have enough new news to break the markets to new lows, with enough certainty in the market that it isn’t bullish to keep buyers at bay. At this point it feels as though time will provide the clarity we need when it comes to shifts in the world vegetable oil outlook and China trade relations, if, that is, we don’t get lulled to sleep by the lack of direction first.
