The Soybean Crush and South America – Outlook on Crush Margins and Inclement Weather

January 28, 2019 in Commodites and Hedging

By Eric Oeth

Many analysts have noted the strength of the domestic soybean crush in recent weeks. In many ways, this record-setting crush shouldn’t be surprising, given the size of the soybean harvest, and the ongoing trade dispute with China.

Another angle to all this crushing has to do with crop quality. While many have commented on the weakness of the basis in many areas of the country, much of the weakness has been attributed to the trade dispute.


(Soybean basis map; image courtesy DTNPF)

The long, wet, often-snowy harvest we experienced in 2018 caused moisture and splitting issues for a lot of soybean producers nationwide. While the USDA didn’t significantly revise many of their quality estimates for soybeans late last year, I suspect that with the government just recently re-opened, we could see some fairly significant downward revisions in quality for the bean crop.

So, the record crush we are seeing right now is a consequence of demand overseas drying up, and crops at home getting too wet. In South America, a lot has been made about the poor weather in their early soybean crop, too, and that is going to have some interesting implications in demand for the soy complex.

Brazilian producers jumped headfirst into planting this year in order to capitalize on the trade dispute between the U.S. and China. As you know, a lot of that crop is in danger of loss due to drought. This issue has been supporting soybean futures stateside, and the bullish news coming out of South America doesn’t end there. Argentina, which lost about 12% of its crush in 2018 due to drought, is having the opposite problem this year – heavy rain has caused some acreage loss, and analysts are pegging a smaller crop for the country in the upcoming harvest.

Between the bulls pointing towards weather trouble in South America, and bears pointing towards uncertainties in U.S./Chinese trade negotiations, I’m personally curious to how the weather situation will develop over the coming months (as the trade negotiations are anyone’s guess at this point).

Argentina, despite producing a fraction of the soybeans that Brazil does, crushes much more as a percentage of their crop than the Brazilians do. A vast majority of the soybeans Brazil sends to China, for instance, are crushed in China rather than in Brazil, and much of the crushing capacity in the country is dedicated to producing oil for biodiesel.

 Due to the ample crushing capacity in Argentina (the drought caused some facilities to close or idle), and the fact that they are dealing with rain rather than drought, I see the fundamental situation in the country as somewhat rosier than that of their northerly neighbor. While Argentina is certainly still exporting unprocessed soybeans abroad (they sent $3.3B worth in 2016, mostly to China), it pales in comparison to the $4.14B and $9.95B they export in oil and meal, respectively, and those exports are aimed primarily at non-China Asian destinations and the European Union.

With that, it will be interesting to see how Argentinian exports compare in price to their American counterparts – particularly if the Chinese don’t come back to the table come March  2nd. If U.S. crushing continues at such a strong pace, and no “safety valve” for American beans emerges from a trade deal, we may see more bushels get funneled to crushers for the domestic and export markets.

When the Clock Strikes Midnight…

July 5, 2018 in Commodites and Hedging

Tomorrow, just after midnight, U.S. tariffs will be slapped on $34B worth of Chinese goods – in a move many are calling the opening salvo of a trade war between the world’s two largest economies.

Stories of transport ships like the Peak Pegasus racing to Chinese shores to beat out the new 25% soybean tariff have been shared on social media, and there doesn’t appear to be an end in sight for this trade dispute. For American export-bound goods, the consequences of retaliatory tariffs on the Chinese side will be difficult to manage; already, we have seen the price for vulnerable crops like soybeans drop more than 16% in the past month.

Just how bad it can be from a price perspective, however, is an open question: while technical movements have been the main source of declining grain prices, could a trade war truly result in a mass production correction?

Experts disagree about the impact a trade war will have on commodity prices; while this last month has been disheartening for bean farmers, a research note released by Goldman Sachs maintains a bullish outlook on the staple in spite of recent losses. The research arm of the bank is forecasting a 10% return on commodities over 12 months as the dollar drops due to trade war. On the brink of a trade war, soybeans are a “buy” for GS, stating in the report that beans have been oversold as they enter sub-840 price territory.

Goldman also states that the rerouting of all beans destined for export is not possible, either; what has been surprising in spite of China cancelling deliveries and rerouting soybeans to places like Bangladesh and Iran, however, is the fact that American bean sellers have been able to find buyers elsewhere in place of China. Although the Chinese have been the largest importer of American beans by far in the last several years, soybean exports are down only 7% from this time last year, according to a Foreign Agricultural Service report released 6/21.

Overall, the impact of a trade war on American commodities will certainly hurt their demand in China, but the impact it will have on global commodities markets remains open: “the trade war impact on commodity markets will be very small, with exception of soybeans, where complete rerouting of supplies is not possible,” added Goldman analysts in the July 4th note.

Trade war concerns will continue to have an impact on commodity prices, until a bilateral solution between Beijing and Washington can be reached; stay on top of trade news by following @packcreekcap on Twitter, and stay tuned for more updates on this ongoing situation.

Week in Review: USDA Crop Reports and Markets

June 15, 2018 in Commodites and Hedging

While we had another week of trade discussions dominating headlines regarding ag commodities markets, especially important news for the markets came out of reports released last week by the USDA regarding crop conditions here in the U.S..

The Crop Progress and Production reports were released Monday and Tuesday, respectively, and

Monday, June 11th, 2018: USDA Crop Progress

Monday’s Crop Progress Report described what many thought was likely: that weather conditions in previous weeks caused spring wheat, corn, and soybean crops to mature a little faster than their five-year averages. Beans, in particular, seemed to do well during a hot week  – not only were the nationwide planting and emergence reports a little further along than the five-year average, the percentages of beans nationally that were described as “good” or “excellent” quality were higher than last year.

Link to full report: http://usda.mannlib.cornell.edu/usda/current/CropProg/CropProg-06-11-2018.pdf

 

Tuesday, June 12th, 2018: USDA Crop Production Report 

Highlights from the Crop Production Report:

  • While Winter Wheat was up 1% from the May estimate, it was still down 6% from 2017’s figures
  • Yields per hectare for wheat were down slightly from 2017, from 3.38 metric tons/hectare to 3.25 in 2018.
  • A “belt” of high temperatures – arcing from the Texas panhandle all the way to West Virginia – really precipitated the aforementioned rapid development of grain crops in the area. This hot weather (the U.S.’ hottest May on record), thankfully, was offset in terms of drought conditions by wetter weather over the Midwest.

may weather report.PNG

(per the report/NOAA Regional Climate Center) 

Link to full report: http://usda.mannlib.cornell.edu/usda/current/CropProd/CropProd-06-12-2018.pdf