As if understanding the soybean market wasn’t already complicated enough, Mother Nature threw a curveball this past summer which has added an extra layer of uncertainty to the Ontario soybean markets. The cooler than normal growing conditions during the late summer created a soybean that is lower in both protein and oil than is typical for this region. Since the two products created from soybeans are proteins and oils, the lower levels in this year’s crop have consequences in value.
In a typical year, southern Ontario grows soybeans which are roughly 35 % protein and 18.5 % oil. However this past growing season’s cooler summer has created a soybean crop which is averaging 34.3 % protein and slightly under 18 % oil. These component values are more typical of northern Ontario and Manitoba, but not for the bulk of Ontario’s 3 million acres of soybean production.
Livestock operations which buy soybean meal from eastern Canadian crush plants will have already seen a lowering of the minimum protein level guaranteed in this crop year’s meal. The difference between 18.5 % oil and 17.7 % oil doesn’t sound very big. Soybean processors make their money from converting oilseed into oils and protein meals and this means that there’s 5 % less oil in every tonne of soybeans (the difference between 185 kgs and 177 kgs). If you’re an oilseed processor, that difference in extraction efficiency is a big deal.
Fortunately for Canadian farmers, in our domestic marketplace, growers sell a grade of crop (in this case Canada Grade # 2 soybeans) and not a quality spec (like 34.5 % protein, 18.0 % oil), so all of the forward contracted or early sales of soybeans which were priced prior to the quality issue becoming fully understood were priced as if those soybeans were of a traditional quality for this growing region. Going forward, both the domestic Canadian and overseas oilseed processors which might purchase Ontario’s 2017 crop soybeans are going to re-think their price bids in order to more accurately reflect the financial impact of these beans on their oil extraction process.
What if new crop South American soybeans come into the world market in March and April with a crop that is higher in both protein and oil content? How do Ontario’s dubious quality soybeans fit themselves into the global marketplace?
There are three possible scenarios with regards to how the market might unfold for Ontario’s soybeans as the southern hemisphere production becomes available. The first is that it’s possible that, like us, Brazil and Argentina could have a cooler growing season and also produce soybeans with lower protein and oil content. In this case, since every production region’s soybeans would be a similar quality, the market values would be largely undifferentiated by origin, and our shortfall in protein and oil production would not impact our position in the world market.
The second, and entirely more likely scenario, is that eastern Canada’s lower-quality soybeans will need to price themselves at a discount to the higher quality soybeans available in the world market, in order for overseas processors to achieve their own business objectives.
The third possibility, is that with higher quality soybeans available from other origins, demand for Ontario’s sub-spec 2017 soybeans will simply drop off if world-wide processors don’t want to meddle with low quality feedstock in their processing plants.
For farmers who are storing this year’s soybean crop in search of a marketing opportunity, the pressure is going to be on to merchandize these stored soybeans before the South American crop is a reality. Locking in the big futures market carries and forward contracting those stored soybeans for delivery in April, May, or June of 2018 is still a strategy which will earn a return. Locked-in prices now for next spring or summer mean that if export sales of 2017 crop soybeans slows down (which would increase ending stocks and be detrimental to price), locking in those higher prices in the forward months provides protection against the impending slow down in demand.
The quality issue with Ontario’s 2017 crop soybeans is certainly not the only issue which will impact the market over the months ahead. South American weather, North American 2018 planting intentions, the Canadian dollar exchange rate, and variations in world demand will remain the key drivers of oilseed prices. Our quality shortfall with this year’s soybeans is just an extra wrinkle in an already tangled net of pricing considerations, but for soybean growers in the Great Lakes basin, it certainly deserves some attention as we make marketing decisions for this crop.
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.