The start of the South American soybean harvest in early March seemed to directly coincide with a significant downward trajectory in North American soybean prices. Yet throughout this whole process there was very little movement in American farmers’ indications on 2017 soybean planting intentions. What did we learn as Brazilian soybean trucks began to roll in from their fields? And what does this mean for Ontario soybean growers as they market the crops which they produce?
During the first half of the South American soybean growing season, especially in November and December, dry conditions had crop watchers concerned about the production potential of this year’s crop. We saw that concern expressed in North American pricing as the Chicago soybean futures rallied significantly, but as we got into January, and some more reliable rains fell across the production region, crop conditions and yield potential both improved dramatically.
In their February 2017 World Supply and Demand Estimates, the USDA pegged Brazilian soybean production for the 2017 crop at 104-million metric tonnes, but by the March report, they had increased it to 108-million metric tonnes. That’s an increase equal to the size of Ontario’s entire soybean production. It might sound like a wild guess, but people familiar with soybean production know that in the last month of the growing season, that if the right weather conditions occur, both the top pods above the last leaf set seed, and the size of all of the soybeans on the plant increase. The perfect environmental finish for Brazilian soybeans leads to a significant increase in yield.
To put the size of a 108-million metric tonne soybean crop into perspective, the Brazilian harvest in 2015 was 97.2-million tonnes. In 2016 it was 96.5-million tonnes. So this current harvest is slightly more than 10 % bigger than what we’ve come to expect from Brazil. Add onto this the 55-million tonnes of Argentinian soybeans, and 9-million tonnes of soybeans from Paraguay and South American soybean production for 2017 is going to be 162-million metric tonnes.
Brazil has a significant-sized domestic soybean crushing industry within its own borders. With approximately 43-million tonnes of domestic soybean demand, the nation of Brazil crushes almost as many soybeans each month as Ontario grows each year. Obviously, there isn’t enough new investment in Brazilian soybean processing capacity to consume the 11 % increase in production in 2017, so essentially all of the rise on soybean output will flow to export markets.
In 2015, Brazil exported 54-million tonnes of soybeans. In 2016, Brazil exported 52-tonnes of soybeans. Based on their 2017 production estimates, the USDA is currently predicting that Brazil will export more than 65-million metric tonnes of soybeans from this year’s crop. This is an increase of 25 % from the previous year’s total, and pushing an extra 13-million tonnes of soybeans into the world market.
Price has already reacted to the enormous size of the South American soybean supply and the equally large increase in North American planting intentions. CME May soybean futures dropped $1 per bushel between February 20 and March 20 as the reality of the soybean yield potential sank in and the spec funds moved from a net long to a net short position in the futures market. For farmers who did take advantage of the higher values seen during the holiday season, now is the time to congratulate yourself on a well-executed marketing plan.
For producers who still need to make soybean sales, now is not the time to panic and wade into a market wallowing in the bearish news of overwhelming supply.
The markets tend to overreact, so be ready to move on the counter swing of the market’s pendulum of price action. The fundamental reality of a record South American soybean crop and record-sized North American soybean planting acreages undoubtedly limit the upside for soybean prices. But it’s still no reason to exit at the bottom.
In the history of agriculture, we have yet to experience a planting or growing season that was free of some weather capable of causing worry for the crop’s health. Ultimately, with 11.5-million tonnes more of soybeans in South America this year than last year, and record plantings on this continent, the upswings will be small. Sellers are going to have to develop very realistic price goals and be extremely disciplined in executing their plan.
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.