Soybean Supplies Dwindling | Blog
Teucrium | October 13, 2020
Seasonal and Fundamental Support for Prices
The soybean price rally that began in mid-August has run contra to the historical seasonal trend. This in large part is due to the market’s recognition that the global soybean balance sheet is as tight as it has been in 7 years. Strong global demand for soybeans is likely to continue to be supportive for prices, even in the face of a potential record-breaking Brazilian crop. Currently, the fundamentals and the seasonal patterns are aligned and may be supportive for prices moving forward.
Source: Signal Trading Group (www.signaltradingggroup.com) Used with permission. Past performance is not indicative of future results. About the Data: The seasonal chart above provides a historic reference of past trends for the soybean market. Average prices over the 20 and 30 year periods are reflective of daily 1st month (spot month) contract data from January 1990, to December 31, 2019
Seasonal Pattern
Historically, soybean prices have put in their calendar year lows in early October, coinciding with the US harvest before trending higher through the winter (see seasonal chart above). The recent price rally, which began in mid-August, has contradicted the typical harvest seasonal move lower. While soybeans have rallied into the harvest this year, the fundamentals appear supportive for a return to the seasonal trend. For this point in mid-October, a return to the seasonal trend suggests higher prices heading through year end.
Demand
The recent run up in soybean prices, while remarkable, has come as no surprise to our regular readers (see our August 11th note An Investment Opportunity In Grains? Soybeans May Be Poised to Lead the Way). The rally has been largely due to record Chinese buying. Through October 1st China had already purchased over 812 million bushels of soybeans from the US. This compares to 176 million bushels purchased through October 1st last year. Some have pointed to the Phase 1 Trade Deal as a catalyst for the record pace of purchases. While the Trade Deal certainly has not hurt, China is buying US soybeans largely because it needs them.
The USDA estimates that China will import a record 100 million metric tons (MMT) of soybeans this crop year (3.743-billion-bushel equivalent), capturing roughly 2/3rd of global soybean exports. Record Chinese soybean purchases coincides with the rebuilding of the Chinese hog herd which was reduced by as much as 50% in last year’s African Swine Flu outbreak.[1] Additionally, the increased demand is likely a result of domestic Chinese production issues. Chinese farmers have been hit with a multitude of natural disasters this year including flooding, typhoons, Fall Army Worm, and locust infestations. The extent of the damage is unclear; however, the record pace of Chinese imports suggests that domestic production has taken a significant hit. What is more, the strong Chinese demand comes at a time when the global soybean supply has been trending lower.
Supply
Global soybean ending stocks[2] where down 17% in the ’19-’20 crop year and are estimated to be down another 5% this year falling to 88.7 MMT. Relative to demand, this would be the lowest supply of soybeans the world has seen in 7 years (’13-’14 crop year). The Stocks/Use Ratio (ending stocks divided by total usage) shows this clearly. Based on current estimates the global soybean Stocks/Use Ratio is approximately 24%. Not only is this the lowest it has been in 7 years, but it is below the 7-year average of 27%.
The global soybean Stocks/Use Ratio reached 23% in crop year ’13 –’14. The average farm price in the US that year was $13.00 per bushel.[3]
Brazil: Record Production
With the US harvest underway, the trade appears confident in the US production estimates. However, planting has only just begun in Brazil. The trade will be very focused on Brazil given that over 1/3rd of the world’s soybeans are produced there.
As it stands, the USDA expects Brazil to contribute 133 MMT (4.89 billion bu.) of soybeans to the ’20-’21 global balance sheet. This represents a 7 MMT, or 5.5% increase YoY in production. While that is a meaningful increase, it matches similar 7 MMT jumps in production in the ’18-’19 and ‘19’-20 crop years.
Importantly, the estimated production of 133 MMT is already reflected on the global balance sheet. The question is: will Brazilian production meet, exceed, or fall short of the estimate? Given the recent news of planting delays, the trade is beginning to think that Brazilian production might fall short, making downward revisions more likely. It is worth noting that even if Brazil produces a record 133 MMT of soybeans, the global soybean balance sheet is still likely to tighten, which would be supportive for prices.
Overestimating Demand?
To be certain, there could be a risk that the USDA is overestimating global soybean consumption. Global soybean consumption has increased by an average of 5% per year for the last 7 years. Current usage for the ’20-’21 crop year is 370.6 MMT, up 5% versus last year, and in-line with the 7-year average growth rate. One might expect soybean prices to come under pressure if the usage figure is revised lower and production estimates are met (or exceeded).
Note, global usage has increased every year for the last 11 years. Even if one were to assume no growth in global usage in the ’20-’21 crop year the Stocks/Use Ratio would only be 25%, still equal to a 5-year low.
Conclusion
The global soybean balance sheet has tightened. US farmers are harvesting soybeans and selling them as fast as possible in the face of record Chinese demand. Given the demand outlook, the balance sheet is likely to remain relatively tight even in the face of record Brazilian soybean production. We would not be surprised to see soybean prices realign with the seasonal trend heading into the winter.
[1] Soybeans are primarily used as animal feed
[2] Ending stocks = total production – total usage
[3] At the time of this writing the front month soybean futures contract is trading at $10.4425.