While the corn market is arguably the market with the worst fundamental outlook, the soybean outlook remains tight for yet another year.
The weather pattern has made another dramatic shift, transitioning from above normal moisture and cool temperatures, to hot and dry. While many like to say beans just need a shot of moisture in the month of August and they are made, that’s not necessarily the case with a hot and dry finish considered less than ideal in most areas.
The less than ideal finish is likely to trim yield potential, though with what has been a relatively phenomenal July and start of August weather-wise across much of the Corn Belt, from where yield is being trimmed is the question.
In the soybean supply and demand matrix, a bushel per acre adjustment to yield has a much greater impact on the overall outlook than in corn. With 82.7 million acres expected to be harvested, a bushel per acre adjustment would take 82.7 million bushels off the supply side, resulting in a dramatic adjustment to carryout without a corresponding adjustment to demand. This would take us from a 245 million bushel carryout to 162.3 million bushels—from tight but comfortable to rationing.
As mentioned, with heat and dryness building in, the big question on the supply side becomes from where yields are being trimmed. Coming into this last week some private analysts were calling for yields above the current trendline of 52 bushel per acre. If true, and we were flirting with above trendline yields and are now looking at an average to slightly below average crop, the current USDA estimate would likely be close at 50.9.
For the sake of conversation, if yields were to come in closer to last year’s final figure of 49.5 bushel per acre, we would have to take 115 million bushels or so off the current USDA estimate, dropping carryout to 130 million bushels without an adjustment to demand. An adjustment to production like this would take stocks to use from an historically tight 5.7% to an impossible 3%.
This conversation is part of the reason we saw November beans add 46 cents this week, after having fallen from a late July high of $14.35 to an early August low of $12.82.
However, the idea we would see a sharp adjustment lower in production, and a subsequent run-up in price without an adjustment to demand is just one of the pitfalls so many tend to fall into whenever we have a debate over production and its influence on price.
So having said that, let’s look at demand. United States soybean demand is made of up two primary categories, crush and exports, with the split being nearly 50/50 for the most part ahead of the trade war and shortly after.
That split in demand is starting to shift, with domestic crush capacity on the rise thanks to renewable diesel demand. In the spring of 2022, there was over 400 million bushels worth of new US soybean crush capacity proposed to come online. Many of those projects are now operational or expected to be online over the next year and a half.
Demand for soybean crush in the US is up 96 million bushels since the 2021/22 crop year according to the USDA. With crush margins nearing record highs and soyoil supplies continuing to contract, many already believe the USDA is underestimating new crop crush demand.
The US is not the only country seeing strong crush margins. Meal prices in China have been on the rise in recent weeks, up significantly from spring lows and helping Chinese crushers see strong margins into the end of the year as well.
The strength in Chinese crush margins has been behind the big push to increase bean coverage by private Chinese crushers. Buying pace had slowed a bit this past week after what had been two weeks of major cargo purchases. Chinese buyers are now reportedly over 60% covered for October, with solid starts to their November and December needs.
What’s most interesting about the strength in US and Chinese values though, is how they look against South American crush margins that are deeply in the red.
Reports have been numerous lately of Brazilian crushers looking at making more by selling their beans into the export market rather than work to turn them into meal and oil. Argentina crush capacity utilization continues to shrink as well, as drought reduced production, a farmer who remains an unwilling seller and poor meal export demand have prompted crushers to shut down versus continuing to hemorrhage cash.
As mentioned, coming into the month of August, Chinese buying had been aggressive on the back of positive crush margins, with crushers having purchased the lion’s share of their anticipated needs to finish out the end of their crop year and start the next. July imports of over 9 million metric tons were well above the amount needed to ship each month, with some anticipating we see similar strength in the months ahead.
However, this is not a slam dunk, as China’s economy seems to be teetering on the brink. We have now made it through the Covid reopening optimism as well as government stimulus optimism with the economic data seemingly only getting worse. The Chinese government has taken steps to help support and stimulate the country’s ailing property sector, none of which are seeming to do the trick.
This week’s news of Zhongrong International Trust failing to make payments on billions of dollars’ worth of investment tools is yet another sign consumer sentiment is unlikely to recover anytime soon. Even if the government can save the ailing property and investment sector, officials have made it clear they are working to incentivize domestic demand for domestic goods.
China in the year ahead is expected to account for 60% of world demand, taking an estimated 99 million metric tons of the 166 mmt of world imports, making what happens economically there that much more important.
Rumors of China’s government buying arm being overbooked continue to run rampant in the cash market, with talk of potential bean unload delays being behind the recent runup in meal demand and subsequent values. While there haven’t been any concrete signs this is happening, it remains something that bears watching.
Of course, everything I’m discussing here hinges on normal production in South America as we remain months away from active planting and production in the Southern Hemisphere. El Nino can cause delayed starts to monsoonal flow in Brazil, something that could slow the start to planting—though it feels important to point out the room for error in Brazil is large with a 163 million metric ton (5.99 billion bushels vs the US 4.2 billion currently projected) crop projected.
In the end, the supply story will keep the focus of the market for the next handful of days as crop scouts with the ProFarmer crop tour get out and start counting pods. Heat builds into midweek before it is expected to break this weekend, with rain needed soon and talk of our first chance of widespread well-organized rain not seen for another 14 or more days.
Beans are the market to watch and will help to support corn and wheat, though it is important to recognize while the underlying bullish enthusiasm is warranted, China remains the driver.
I’ll be watching the tour this week to see if what looks good from the road looks good to scouts. What happens in the Black Sea will be key too, as the situation there seems to be escalating, though both Russia and Ukraine seem committed to keeping grain moving no matter what.
As always, don’t hesitate to reach out with any questions. Have a great week!
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
