As farmers, we are essentially all wired to watch crops grow and have an intuitive sense of how conditions in the field are going to impact the marketplace. Although that’s a great skill to develop, the challenge of operating our businesses in a global marketplace is that some of the fields are just too far away to watch.
About three-quarters of the soybeans grown in Ontario leave this province and are consumed in another part of the world. Essentially all of Ontario’s 1 million tonnes of food grade (IP, SQWH, and non-gmo) soybeans are exported, (primarily to Asia) and nearly 2 million tonnes of crusher soybeans are also surplus to Ontario’s oilseed processing demand and end up being shipped to other parts of the world. Because so much of Ontario’s soybean crop is sold into the global marketplace, our local prices are just a reflection of world demand, with the freight backed off in order to arrive at a value at our nearby elevator. If the domestic oilseed crushers need to buy soybeans, all that they have to do is offer enough to stop the crop from leaving the province, but the underlying value is still a function of international demand.
Global soybean production in 2019 is estimated at 337.48 million metric tonnes (down about 6 % from 2018’s record world soybean production of 358.21 million metric tonnes), and Ontario’s portion of the world’s soybean supply is only about 4 million metric tonnes (or 1.25 % of the total). Although our province’s soybean prices are established based on our soybeans’ capacity to enter the world market, our portion of the world supply is so small that a production issue in Ontario has no capacity to impact prices in the market.
Nearly half of the world’s soybeans are grown in South America. In 2019, Brazil produced 87 million metric tonnes, Argentina grew 54 million metric tonnes, Paraguay 10 million, and Bolivia and Uruguay came in between 3 and 4 million metric tonnes each. By contrast, the United States’ 106 million metric tonnes of soybeans and Canada’s 6 million tonnes combined only total 31 % of the global soybean supply, so the crop progress in South America over our winter has an enormous ability to impact prices for our local growers, far more than American crop conditions can affect prices during our summer growing season.
One of the things that I’ve learned over my life in farming is that weather forecasters are rarely accurate for more than a few hours, and since I’m not a meteorologist, and newspaper isn’t instantaneous, we’re not going to make the error of offering a forecast for 2020 soybean production in South America other than to say that we are currently about 70 days away from harvest, and they should expect to see weather in all 70 of those days. Our job as Ontario soybean marketers is not to guess the South American weather, but rather to observe it, and be prepared to react when we get a weather market which creates a sales opportunity for our soybeans.
If you look at the previous three years of November soybean futures charts on the CBOT, (2017, 2018, and 2019), in all three of those years , the prices of the November futures contract was higher through the winter and spring than it was after North American soybean planting started. With the exception of one weather spike each year, you could sell soybeans for a higher price in the summer than could have been forward contracted during the winter. Although I would certainly suggest holding on to at least a few soybeans in order to capture a summer weather rally, we also know that the market pays for risk. Since the majority of the world’s soybeans are standing in the field in January, February and March, there’s more risk premium embedded in the price before South America’s harvest than there is after 50 % of the world supply is safely harvested and put away. The biggest weather markets occur when the biggest portion of the world’s crop is growing, and that happens during our winter.
With the internet, monitoring South American crop growing conditions is really easy for Ontario farmers, but an even simpler way to capture a marketing opportunity created by a weather issue in Brazil or Argentina is to have some “resting orders,” or “pricing orders” with your grain preferred grain buyer. Even a series of small orders at escalating prices, (for example three resting orders, each one $0.25 higher than the next), is a great way to lock in some of the price gains which South American weather creates for us while we are watching soybeans grow this winter.
Steve Kell operates a Simcoe County crop farm and is an independent market analyst.