Kicking the Can
Written for Sevita by Bailey Elchinger, Risk Management Consultant and Regional Director, FCM Division of StoneX Financial Inc.
The month of November proved to be much like the month of October. The supply side of the soybean balance sheet got a ‘shot in the arm’ this month when the USDA increased their estimate of the U.S. soybean yield to 49.9 bushels/acre – which was 0.3 bu/acre larger than the prior month. Without a large increase in bean demand this month we saw the carryout for soybeans grow to 245 million bushels. While this is still lower than last year’s carryout, it is still historically associated with prices above $12/bushel. Overall, the balance sheet for beans is still tight and doesn’t leave much room for error. With that said, the supply side of the balance sheet is essentially decided, leaving the demand side of the equation the biggest question mark...
When considering soybean demand there are two key aspects to study: crush and export demand. Crush demand has historically been based around domestic soybean meal demand as we would crush the soybeans to make soybean meal and had the ‘byproduct’ of soybean oil. The renewable diesel industry has become a significant demand source for soybean oil and soybean meal has become a bit of the ‘byproduct’. There is not currently a mandate from the U.S. government to produce or use renewable diesel – which has kept a ‘lid’ on growth in that industry. Another user of soybean oil has been the biodiesel industry. Contrary to Renewable Diesel, which is chemically the same as petroleum diesel, biodiesel must be blended with petroleum to be consumed. Historically small refiners were NOT exempt from the blending requirements for biodiesel. In a court decision this month it was decided that the small refiners ARE exempt from these requirements – which would result in less soybean oil demand. This also impacts the profitability of the blending plants which could inhibit some growth that was expected for the industry.
The other large factor on the demand side of the bean balance sheet is export demand. The months of October and November are historically the key months for North American soybean exports due to the overall availability of supply. This year there are key factors slowing down this demand. One factor is the lack of Chinese demand for U.S. soybeans. There are numerous reasons for this lack of demand, one of which is the Chinese economy. The Chinese economy continues to be lackluster at-best which ultimately impacts their pork demand. Slow pork demand hurts the hog industry's profitability and ultimately slows hog production. A slowing pork industry in China impacts their soybean and meal demand. To compound that lack of demand in China is the issue of transportation costs from the U.S. to China. Low water levels in the Panama Canal have limited the number of vessels able to travel through the key waterway. Limited vessels being able to pass through the canal each day adds significant time to the normal transportation time from North America to China. The increased time also results in increased costs. These skyrocketing costs puts South American beans much more competitive pricewise delivered into China than they would typically be this time of year.
To further the ‘kicking of the can’ when it comes to price has been weather concerns in South America. There are areas of Brazil that have received excessive rain while other areas are abnormally dry. Trying to evaluate the extent of any crop damage is difficult but the headline concern was enough for the soybean market to add risk premium back into prices. Not only does Chinese demand set the tone for U.S. export demand but the size of the South American crop is a large determining factor as well.
Eventually, we will get caught up to the ‘Can’ we have kicked down the road. When that happens will we still be at the levels we see today, or will we be lower? As with all demand markets, the bean market will struggle to predict future demand and as a result, will be somewhat ‘reactionary’ once we catch up to the ‘Can’.
Farmers should be ready to act to take advantage of any strength that the bean market experiences as we follow the ‘Can’ down the road.