Steve Kell’s
Market Minute
The key variable which drives our grain prices each winter is South American weather. However, now that it’s March and we’re deep into harvest in the southern hemisphere the power of Brazilian weather to impact world prices has diminished. The question now is how did the South American crop set the stage for North American demand?
It’s been really interesting to watch soybean conditions fade as their crop has progressed through the 2021 – 2022 growing season. In December, estimates projected South America’s 2022 soybean harvest at a record 20-million metric tonnes. A month later, in the January report, as the dry weather persisted, analysts lowered the expected crop size to 194-million metric tonnes. Still a record, but substantially smaller than previously thought. By the time that the February crop report came out, the production estimate shrunk to 185-million metric tonnes. A 19-million metric tonne reduction in South American soybean production in just over 90 days. A pretty staggering figure when the Province of Ontario only grows about 4-million tonnes of soybeans each year.
As we moved from December into March, the crop size estimates in the middle of the growing season have become measurable realities as combines move across South American soybean fields. In December, crop analysts were looking at knee-high soybeans and trying to evaluate their yield potential. By March, loaded trucks are rolled across the scale plates and the yield measurements are both accurate and final.
To use a baseball analogy, it looked like South America had hit a homerun with its 2022 soybean crop, but it hit the outfield fence, and stayed in play. What looked like a homerun swing turned out to be a really long single. To keep everything in perspective, the 5-year average size of South America’s soybean production is 184.2 million metric tonnes, so finishing up with 185 million this year does not suggest that the world is going to run out of soybeans. It’s just average. Just like a well-hit baseball that simply didn’t carry. Their soybean crop started off looking great, and simply ended up being average.
Because more than half of the world’s soybeans are grown in South America, our prices reacted very quickly to the dry weather’s impact on their production potential. When the December crop report predicting production potential of 204 million tonnes of South American soybeans was released, Chicago March soybean futures were $12.60 per bushel. When the January report was released, shaving South American soybean production estimates down to 194-million tonnes, Chicago March soybean futures were trading at $13.65. Following the February report where soybean production was shaved a further 9 million tonnes to 185 million, Chicago March futures rallied up to $15.80. Over the course of those three crop reports, production declined by 9.3% and prices rose by 20.2%.
Our marketing strategy as Ontario growers has to shift away from waiting to hear weather news from the southern hemisphere and then trying to capitalize on the ensuing price reaction. The 2022 South American crop size can’t change now. Not until next year, but their climatically-troubled growing season, does alleviate a lot of problems, which had been facing our marketplace going into the spring. The crop size reduction in South America leaves a lot of demand space open should North America plant a record-sized crop.
One of the biggest variables for North American farmers as we moved closer to the start of spring seeding was the question about how many acres of soybeans might get seeded this year. Good returns from soybeans over the previous couple of years and record-high nitrogen fertilizer prices had created a lot of speculation that North America’s soybean acres in 2022 could be much higher than previous years and potentially even a record large crop. Had our competitors in South America actually harvested a record 204-million metric tonne soybean crop, prices would be a lot lower. The drought’s impact on South American yields has bought us a lot of wiggle room to increase soybean acres in 2022 without toppling price.
Obviously, there is a limit to how much soybean acres could rise, and it is all but certain that prices will react to the USDA’s Planting Intentions Report when it is released on March 31, but an increase of 3 or 5 million acres of soybeans in the US this coming season is easy enough to deal with when it’s following a southern hemisphere harvest that fell 19-million tonnes short of its production potential. As North American growers, we’ve got room to produce more without having a crushing impact on price.
Steve Kell operates a crop farm in Simcoe County and is a former grain merchant for Parrish and Heimbecker Ltd.
