I’ve spent the last couple of weeks outlining what I am watching in the feed grain markets, first with wheat and then corn. This week, I figure it is the soybean market’s turn.
I would imagine if you asked most anyone their outlook on soybeans these days, they would tell you they are incredibly bearish, outlining US carryout, South American production gains and a poor outlook on China. Obviously, they would not be wrong as we are looking at an historically large US ending stocks projection of 550 million bushels, are anticipating over a half a billion bushels of additional South American production and are watching a slow-motion economic disaster in China.
Soybeans have the worst story of the three major markets for sure. But if there is one thing I have learned in the 20 years I have been doing this, anytime anything feels for sure, it likely isn’t. Let’s take a look at what’s happening in beans this week and what I think will be important to watch in the weeks and months ahead.
US Production Outlook
I am trying to avoid sounding even remotely dramatic when I say, but the finish the US crop has had this year is one of the worst you could have for soybeans.
Soybeans are a crop well-known for hanging on throughout bad conditions during the growing season, with the old adage being they just need one good rain in August. While I will say in my experience, one good rain at the start of the month helps, it takes two to three good rains spread out from the start of August to the middle of September to get record bean yields.
Above is the percentage of normal precipitation seen for the last 30 days across the country. You will notice a good portion of the Corn Belt saw less than 10% of normal precipitation for the timeframe.
I am not an agronomist, but I work with several throughout the state and across the country, many of which are cautioning bean yield loss potential of 15% or more from what we thought we would see at the start of August. In addition to yield loss from the poor finish, we are hearing widespread stories of beans being harvested 3-6% below the 13% moisture threshold, with yield there being lost through evaporation.
What this means for national yields is obviously a bit difficult to pin down, but I think we could say upwards of 3 bushels to the acre could be lost, just with a 5% yield adjustment nationally. A 3 bushel to the acre reduction with all other factors left unchanged would lead to a sub 300 million bushels ending stocks figure, quickly changing the feel in the market with relative ease.
South American Production
Whether US demand could be left unchanged if we were to experience a yield reduction as outlined above would likely hinge on what happens in South America in the year ahead. As it stands currently, South American production looks to increase 20 million metric tons over last year, with talk that that increase could be greater if Argentina chooses to up their bean acres versus corn.
While it is early yet, dryness in Brazil and Argentina remains something to watch. An historical drought has encompassed much of Central and Northern Brazil, with parts of Argentina struggling with reduced rainfall as well. The drought in Brazil is the worst seen in 30 years, dropping river levels across the country and sending sugar and coffee prices soaring.
It does appear as though moisture will move in after the first of October, with the Euro models consistently calling for the monsoon to develop on schedule across Brazil, likely allowing for planting to start on time. With La Nina expected to be fully in place this fall, worries seem to be centered on Argentina’s outlook, though heavy rainfall across Southern Brazil will need to be watched as well, as it could become problematic.
Demand
The demand for vegetable oil around the world continues to surge, not only because of a growing population with improving diets, but also from biofuels.
There has been a lot of attention placed on the US biofuel industry and some of the disappointing demand trends we have seen lately. The increased use of imported Chinese used cooking oils, and other developments have led to thoughts that we will see less demand than many in the industry had expected just a couple of years ago. Some analysts have said these disappointing trends would lead to crush projects being stalled and poor margins across the industry, however, this is something we have yet to see happen—though there have been a handful of smaller biodiesel refiners noted to have shut down as the industry has transitioned to a model with more outside energy company participation.
US soybean crush capacity is expected to continue to expand at a relatively decent clip, growing an additional 23% over the next three years. Some have suggested this would lead to an over supplied product market but when looking at expansion expected elsewhere, export demand for both crude and refined products will likely remain elevated.
Expansion in Brazil with the recent passage of the “Fuels of the Future” bill is expected to result in upwards of 20 million metric tons of additional crush demand in the county. Indonesia for its part is working towards a 40% national biodiesel blend, likely cutting into the exportable surplus the world’s largest palm oil exporter has going forward. So, while our domestic renewable fuels journey still feels a little unclear, growing demand elsewhere should help to keep soybean oil and biofuel exports relatively stout, putting a floor under not only demand, but under prices as well, at least in the short term.
EUDR
The European Union’s Deforestation Regulations are the biggest factor likely to change grain flows many folks on the outside of the European Union or the EU adjacent cash markets have never heard of. First voted into law by EU member states in 2022, it was ratified last year, with a start date of December 30, 2024. By all accounts, the program requires anyone trading cattle, cocoa, coffee, palm oil, rubber, soybeans and lumber to guarantee the products they are sourcing and selling do not contribute to deforestation around the world. For the most part it seems the program is a lot of paperwork and taking their word for it, much like many similar programs we have seen in the past. The requirement is time consuming and very difficult for any type of major multinational company to implement as one shipment of beans could come from thousands of different farms. The US of course, stands to benefit the most from this program, with many growers able to certify that thousands of their acres have been in operation for decades without any kind of deforestation.
Some member countries are joining with trade groups calling for a delay to the program, with officials from Brazil joining the chorus recently, saying it will affect 30% of their overall exports to the EU. Experts say a delay would take an agreement from all 27 member states, something that may prove difficult before the end of the year, leading many US companies to start implementing the certification process.
This will remain something to watch as the US stands poised to gain a significant amount of EU market share in the short term if the program keeps its end of the year start date.
China
We can’t talk about soybeans without talking about China, of course, but talking about China with confidence is something I am finding to be increasingly difficult.
China’s economic woes are not new, in fact we are on year three of falling property values and worsening consumer sentiment. The pressure on the country’s leadership for a widespread, direct to consumer stimulus package continues to grow, though Xi so far remains steadfast in his belief it is unnecessary to do so.
Without a direct to consumer stimulus package, it is likely we will soon see China’s outlook stabilize after a significant amount of other fiscal policies have been implemented. However, this stabilization does not necessarily mean improvement, likely to keep consumers holding tight to their money and keeping the demand outlook poor.
A direct to consumer stimulus plan as outlined recently by some of the country’s economists though would likely change the attitude significantly and remains something to watch.
With or without stimulus though, China’s demand has picked up as of late, with more purchases expected as US values remain competitively priced.
Of course, what happens with trade after the election is a whole article of its own, though I will say I’m an outlier in my opinion that China has too many trade problems to properly follow through with all their threats. Eventually the need for food wins, and with over 64 different anti-dumping claims issued against China this year by a whole host of countries—including Brazil—the situation this go around is very different than the last time. China has worked to reduce their dependence on US beans for the last 5+ years, this is unlikely to change anytime soon, no matter who wins the election, with trade flows already having changed as a result. South American production and prices will likely have more of an influence on the percentage of market share the US gets of their bean imports than anything else.
In The End
All of this and a handful of other things too mundane to mention are why I am taking a relatively agnostic approach to the bean market. If you were to make me take a position, I would tell you I feel we are closer to support than resistance at current levels. It is likely to take a significant amount of time for the overall bean situation to become completely clear, with logistical headaches along the river likely to muddy the outlook a bit as well.
We will continue to watch yield reports come in as we wait for the USDA’s updated quarterly stock figures on the 30th of the month, with more production insight in the October supply and demand update. We will be holding a webinar on Brazil at the end of the week, with Eduardo Vanin from Agrinvest. Agrinvest is a well-followed cash brokerage and analytical firm out of Brazil, making for a fantastic conversation and Q and A. Register for that here: Brazil Webinar
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.
