OPINION: Resolve trade war and we’ll still need two years for soybeans to return to 2016-2017 price levels

In the search for a good news story which might lead to a strengthening in soybean prices, a large number of Canadian farmers are following the ongoing trade negotiations between the United States and China in the hope that a deal will end the sanctions on American soybeans entering the Chinese market, and return the oilseed crop back to the price levels Ontario producers enjoyed before this trade war started. Although it would be great to see China and the Americans resolve their commercial issues, optimism over how much good that might do for Ontario soybean prices needs to be measured.

All other things being equal, a trade dispute should not impact the world-wide soybean supply and demand balance sheet. If you have the same number of acres producing soybeans, and the same number of consumers utilizing them across the globe, then all that the trade restrictions do is impair the efficiency of the transportation and logistics model and add freight cost if the commodity is forced to move in something other than the most efficient freight pattern. Certainly the cost of movement model has suffered under the current trade war, but other factors are also weighing on soybean prices.

A lot of things have changed since the first Chinese tariffs were announced back in March of 2018. Those initial sanctions were actually imposed in July of 2018, while the world was still working its way through a much smaller soybean supply. Global soybean production in the 2017–2018 crop year was 346-million metric tonnes. For the 2018–2019 production year, world soybean production increased almost 5 % to 362-million metric tonnes.

At the same time that soybean production increased, there has been some destruction of demand, particularly in the Chinese market. When soybeans are processed, the oil is used in a myriad of vegetable oil products and the co-product soymeal is used as a protein source in livestock feeds. Over the past eight months, African Swine Flu has ravaged the Chinese pig herd, reducing it by as many as 79 million hogs. Depending on how long those barns stay empty, the loss of so many pigs represents a reduction of between 25 and 30 million tonnes of pig feed, which would require 6 million tonnes of soymeal, made from 7 million tonnes of soybeans.

Even if the Americans and the Chinese can reach a trade deal and eliminate the soybean tariffs, the world market will not return to the situation that it was in before the sanctions were imposed because there have been some big shifts in the world’s soybean supply and demand balance sheet over the past 15 months. We’re now pricing soybeans in a market with a different supply so we’ve got fundamentally different values.

Even if China and the United States could resolve their issues, it would be useful for Ontario soybean growers if Canadian farmers were no longer sitting right beside some of the cheapest soybeans in the world. Last month, the value of soybeans in the Brazilian port of Paranogua was US $1.15 over Chicago, and at New Orleans in the U.S. Gulf, soybeans were US $0.74 over Chicago. That US $0.41 might not seem like a lot, but it’s $15/tonne in U.S. funds or about $20/tonne Canadian, and what it really says is that if you can’t go to China, there’s a discount for that.

The local issue for Ontario farmers, which results from the cheaper U.S. soybeans, is that we have two soybean processing plants in this province which are located near the U.S. border (Hamilton and Windsor), and there are no restrictions on soybeans crossing the Canada-U.S. border. There isn’t an enormous volume of American soybeans flowing into Ontario, but the Ontario market isn’t very big either. Ontario relies on international exports to move our soybean crop, and recently, we’ve relied on those export markets even more.

It would certainly help Ontario soybean prices if the United States and China could work out a resolution to their current trade war. U.S. soybeans would be better able to flow into their traditional markets, and that would help Canadian soybeans shift back into their normal trade flows as well, but it will take a year or two of lower global soybean production to return prices to the 2016–2017 price levels.