MARKET DEVELOPMENT
Soybean Outlook: Record Exports, Biodiesel Support Prices
Soybean Outlook: Record Exports, Biodiesel Support Prices
03/01/2017 (Agri News) - Export demand for soybeans continues to be strong after record production in 2016, and more acres is forecast for next year.
How all of that plays into the soybean complex and prices was examined by Darrel Good, University of Illinois agricultural economist and professor emeritus, at the Illinois Farm Economics Summit. Here are his insights:
On Exports
Soybean exports continue to be extremely strong and have grown to record levels four consecutive years. It’s projected to be over 2 billion bushels this year in spite of continued expansion in South American production.
South American production since 1995 has gone up an average of nearly 230 million bushels a year, so we do have a lot of competition. Production was down just slightly this past year. I expect it to rebound in 2017.
But even with that competition, Chinese demand is driving exports. Since 2000, China has been increase imports by an average of over 180 million bushels a year to now a little over 3 billion bushels of imports from all sources.
That has really buoyed the export demand for soybeans, and it is critical that that demand continues to grow as we go forward. We don’t really see a setback in this demand anytime soon.
Can this rate of growth continue? Perhaps not, but I think directionally it probably will still go up.
On Domestic Demand
Domestic crush continues to be well supported. We’re seeing a good demand for soybean meal which drives crush. U.S. soybean crush is always driven by soybean meal demand because soybean meal is basically not storable.
Whatever the demand is for soybean meal determines the crush. If you have too much oil, we can store it.
If we don’t have enough oil, the price goes up in order to reduce consumption. Whatever the meal demand is, we live with the oil results.
On Biodiesel
We’re experiencing kind of a shift in the demand for soybean oil, and that’s the demand in the biodiesel market. It is projected for the current marketing year that we will consume 6.2 billion pounds of soybean oil to make biodiesel, and soybean oil only represents about half of the feedstock that goes into biodiesel production.
That’s a very sizeable jump from last year, and that’s being driven by the Environmental Protection Agency’s announcement of the advanced fuels mandate for 2018. That was surprisingly large.
EPA has signaled that they’re going to push advanced fuel consumption, primarily in the form of biodiesel. So, from a policy standpoint, as we change administrations, this is going to become a very important point.
Will the new administration pursue the same kind of push strategy on biodiesel? If so, then we see the potential for this number to keep going up and going up fairly substantially.
I think going forward, probably not in 2017, maybe not in 2018, but if we continue this policy into 2019, 2020, we could see this scenario change where it’s the soybean oil that’s leading the complex, and it’s going to change that relationship of prices.
How that nets out for soybean prices is still to be determined. It may be just a tradeoff.
Right now, the push of soybean oil has elevated soybean prices and it’s one of the major reasons that soybeans are still at the $10 level is because of soybean oil and those prices have come up substantially since that renewable fuel standard announcement was made on Nov. 23.
On Surplus
Even with the good demand, we’ve been kind of overwhelmed by the size of the crop, and we see ending stocks growing to about 480 million bushels, which is about 12 percent of our consumption rate, well below the 18.6 percent in 2006-2007.
Four percent carryover is about as low as you can go. So there’s about an 8 percent surplus in terms of stocks-to-use. Even so, you would argue that soybean prices have remained well supported in the face of this kind of surplus at yearend.
It creates a fair amount of head-scratching among folks with surplus of soybeans, a rebound of production coming in South America this year, yet we’re still above $10 on soybeans when the corn is sub $3.50.
Near term, the explanation is soybean oil, not only for biodiesel demand, but a bit of a shortage of palm oil and very strong Indian demand for vegetable oils. So it’s all coming from the oil side at this point.
On Acreage
The U.S. Department of Agriculture did raise its projection of the average price for the current marketing year to $9.45. Now the question is production in 2017.
Everyone thinks we will see more acres of soybeans coming from both corn and wheat where soybean prices can be more profitable at this point. The question is how aggressive will the response be from U.S. producers. I’m thinking of about a 4 million acre increase in soybean acres.
On Yield
Yields have been well above trend the last three years, and it raises the question of: have we moved to a different level of soybean yields and has the trend changed and accelerating at a faster rate?
From 1960, we’ve increased yields by an average of .42 bushels per year. Is that accelerating at this point, and if so, what’s driving that increase?
Until we get a few more years of observations, we’re not going to be able to answer that question, but it makes it challenging to form an expectation for next year.
On Supply And Demand Balance Sheet
For my balance sheet for 2017-2018, I put in a trend yield of 48 bushels per acre and 4 million more acres. Despite more soybean acres, a return to trend yield would result in 200 million less bushels produced than in 2016.
With old crop ending stocks of 480 million bushels, ending supplies for new crop would increase to 571 million bushels. Exports remain at 2.05 billion bushels, and crush demand is increased by 5 million bushels to 1.935 billion bushels.
This balance sheet says to me that soybean prices next year would be sub $9. That may be too pessimistic. The USDA is slightly above $9 on their expectation, but even if this balance sheet would say $9 or $9.25, then you’re looking at $10 bids at this point for next year’s crop.
On Marketing
With everybody kind of in the same camp of expecting more soybean acres and the potential for a further build in soybean stocks next year, we’re really trying to understand why soybean prices are still at the $10 level, as well. It’s either a golden opportunity to be selling new-crop soybeans or we’re missing something that the market knows and we don’t know at this point.
I think there’s a downside risk for soybeans at the current levels. The market is $10, and that’s offering an opportunity to be doing something on new-crop soybeans, getting into some kind of price protection in place, particularly if you are going to increase soybean acreage because prices are $10, and a reasonably question is: why not sell that increase at that $10 price, if that’s the reason you’re expanding?
Whether you’re cash contracting or hedging or using some kind of option strategy, it’s probably an opportunity to do some kind of price protection for next year’s soybean crop. How aggressive and what tool you use is an individual question, but I think you have to recognize that there is some risk at this point to those prices.
How all of that plays into the soybean complex and prices was examined by Darrel Good, University of Illinois agricultural economist and professor emeritus, at the Illinois Farm Economics Summit. Here are his insights:
On Exports
Soybean exports continue to be extremely strong and have grown to record levels four consecutive years. It’s projected to be over 2 billion bushels this year in spite of continued expansion in South American production.
South American production since 1995 has gone up an average of nearly 230 million bushels a year, so we do have a lot of competition. Production was down just slightly this past year. I expect it to rebound in 2017.
But even with that competition, Chinese demand is driving exports. Since 2000, China has been increase imports by an average of over 180 million bushels a year to now a little over 3 billion bushels of imports from all sources.
That has really buoyed the export demand for soybeans, and it is critical that that demand continues to grow as we go forward. We don’t really see a setback in this demand anytime soon.
Can this rate of growth continue? Perhaps not, but I think directionally it probably will still go up.
On Domestic Demand
Domestic crush continues to be well supported. We’re seeing a good demand for soybean meal which drives crush. U.S. soybean crush is always driven by soybean meal demand because soybean meal is basically not storable.
Whatever the demand is for soybean meal determines the crush. If you have too much oil, we can store it.
If we don’t have enough oil, the price goes up in order to reduce consumption. Whatever the meal demand is, we live with the oil results.
On Biodiesel
We’re experiencing kind of a shift in the demand for soybean oil, and that’s the demand in the biodiesel market. It is projected for the current marketing year that we will consume 6.2 billion pounds of soybean oil to make biodiesel, and soybean oil only represents about half of the feedstock that goes into biodiesel production.
That’s a very sizeable jump from last year, and that’s being driven by the Environmental Protection Agency’s announcement of the advanced fuels mandate for 2018. That was surprisingly large.
EPA has signaled that they’re going to push advanced fuel consumption, primarily in the form of biodiesel. So, from a policy standpoint, as we change administrations, this is going to become a very important point.
Will the new administration pursue the same kind of push strategy on biodiesel? If so, then we see the potential for this number to keep going up and going up fairly substantially.
I think going forward, probably not in 2017, maybe not in 2018, but if we continue this policy into 2019, 2020, we could see this scenario change where it’s the soybean oil that’s leading the complex, and it’s going to change that relationship of prices.
How that nets out for soybean prices is still to be determined. It may be just a tradeoff.
Right now, the push of soybean oil has elevated soybean prices and it’s one of the major reasons that soybeans are still at the $10 level is because of soybean oil and those prices have come up substantially since that renewable fuel standard announcement was made on Nov. 23.
On Surplus
Even with the good demand, we’ve been kind of overwhelmed by the size of the crop, and we see ending stocks growing to about 480 million bushels, which is about 12 percent of our consumption rate, well below the 18.6 percent in 2006-2007.
Four percent carryover is about as low as you can go. So there’s about an 8 percent surplus in terms of stocks-to-use. Even so, you would argue that soybean prices have remained well supported in the face of this kind of surplus at yearend.
It creates a fair amount of head-scratching among folks with surplus of soybeans, a rebound of production coming in South America this year, yet we’re still above $10 on soybeans when the corn is sub $3.50.
Near term, the explanation is soybean oil, not only for biodiesel demand, but a bit of a shortage of palm oil and very strong Indian demand for vegetable oils. So it’s all coming from the oil side at this point.
On Acreage
The U.S. Department of Agriculture did raise its projection of the average price for the current marketing year to $9.45. Now the question is production in 2017.
Everyone thinks we will see more acres of soybeans coming from both corn and wheat where soybean prices can be more profitable at this point. The question is how aggressive will the response be from U.S. producers. I’m thinking of about a 4 million acre increase in soybean acres.
On Yield
Yields have been well above trend the last three years, and it raises the question of: have we moved to a different level of soybean yields and has the trend changed and accelerating at a faster rate?
From 1960, we’ve increased yields by an average of .42 bushels per year. Is that accelerating at this point, and if so, what’s driving that increase?
Until we get a few more years of observations, we’re not going to be able to answer that question, but it makes it challenging to form an expectation for next year.
On Supply And Demand Balance Sheet
For my balance sheet for 2017-2018, I put in a trend yield of 48 bushels per acre and 4 million more acres. Despite more soybean acres, a return to trend yield would result in 200 million less bushels produced than in 2016.
With old crop ending stocks of 480 million bushels, ending supplies for new crop would increase to 571 million bushels. Exports remain at 2.05 billion bushels, and crush demand is increased by 5 million bushels to 1.935 billion bushels.
This balance sheet says to me that soybean prices next year would be sub $9. That may be too pessimistic. The USDA is slightly above $9 on their expectation, but even if this balance sheet would say $9 or $9.25, then you’re looking at $10 bids at this point for next year’s crop.
On Marketing
With everybody kind of in the same camp of expecting more soybean acres and the potential for a further build in soybean stocks next year, we’re really trying to understand why soybean prices are still at the $10 level, as well. It’s either a golden opportunity to be selling new-crop soybeans or we’re missing something that the market knows and we don’t know at this point.
I think there’s a downside risk for soybeans at the current levels. The market is $10, and that’s offering an opportunity to be doing something on new-crop soybeans, getting into some kind of price protection in place, particularly if you are going to increase soybean acreage because prices are $10, and a reasonably question is: why not sell that increase at that $10 price, if that’s the reason you’re expanding?
Whether you’re cash contracting or hedging or using some kind of option strategy, it’s probably an opportunity to do some kind of price protection for next year’s soybean crop. How aggressive and what tool you use is an individual question, but I think you have to recognize that there is some risk at this point to those prices.