Steve Kell’s
Market Minute
More than 90 % of the world’s soybeans are grown in North and South America. With the three biggest producers (Brazil, United States, and Argentina), and a handful of minor producers like Paraguay, Uruguay, and Canada, the world’s number one oilseed crop is actually grown on a relatively small portion of the entire globe.
That’s key for us to remember as the Russia –Ukraine war carries on and grain export challenges out of the Black Sea continue to make headlines. The soybean market is largely driven by things outside of eastern Europe and we need to consider how the forces drive soybeans differently.
Soybean futures prices on the Chicago Mercantile Exchange actually made their big jump up through the $17/bushel price threshold following the February 10 USDA’s World Supply and Demand Estimates where they confirmed the lower South American yields due to this past season’s drought. That was a full two weeks before Russian tanks rolled across the border into Ukraine. It was a third step up in soybean values following both the December and January USDA reports, where analysts lowered their expectations for South American soybean production due to drought, and price responded accordingly.
Estimates of the South American soybean crop production shrunk by 20 million metric tonnes between the planting time yield estimates in November’s report and the February reports when the crop was reaching maturity.
The environmental phenomenon that caused droughts in South America over the past two years is known as “La Nina” and refers to a situation where the surface temperature in the equatorial Pacific Ocean is cooler than normal.
For North American soybean producers this is the second consecutive year that we’ve seen the same thing happen. A La Nina drought impacted South American soybean production. The biggest portion of the South American soybean growing season is November through February, so just as Ontario farmers are wrapping up harvest, soybean prices start to rally as portions of the South American crop shrivel in the drought.
It has created something of a confounding case of seller’s remorse for Canadian soybean growers because in the spring of 2020, they forward booked soybeans for $13, and then watched prices climb to $17 by the winter. The situation repeated itself in the spring of 2021 when growers could forward contract soybeans at $15, and then watched values rally to $19 by the year’s end again because of the November, December, January drought in South America. The question that we as soybean growers need to answer this summer as we contemplate locking in harvest soybeans at $19 is: Can this La Nina drought happen again? Because the answer to that question tells us how aggressive to be when it comes to forward pricing our soybean crop.
The question of whether or not we could see three La Nina weather events in a row was already answered quite recently. 1998-1999, and 1999 – 2000 were recorded as “strong” La Nina years and 2000 – 2001 was considered a “weak” La Nina year. It is certainly not impossible to get three La Nina years in a row, but the question for soybean marketers is just how likely is it to get a La Nina three-peat? While the answer to that question is not yet known, it is easy to watch. Through the past March, April, and May, the surface temperature in the equatorial Pacific stayed cooler than normal. That is not unexpected. It’s an enormously big volume of water, and clearly takes some time to moderate, but if this cool trend extends into August and September, then it is almost certain to impact the growing season for South American soybeans, and therefore have an impact on world wide soybean prices.
Fundamentally there is really very little going on in the world’s soybean supply and demand balance sheet which should upset the market. North American soybean export sales have been running slightly ahead of expectations, (which is to be expected if South American had a smaller crop), and the increase in sales volume has cut into ending stocks, but the export sale pace has been unfolding for 5 or 6 months now and certainly isn’t going to rattle the pricing complex.
U.S. farmers have planted 90.9 million acres of soybeans this spring, (104% of last year’s acreage). It is a noteworthy increase, but not a market breaker following a drought reduced South American crop.
While we don’t yet know if the La Nina weather event can extend into the fall of 2022, we certainly know what to watch. The fortunate part about living in the age of the internet is that there is practically nothing you can’t learn about in 15-key strokes on Google. As growers and marketers of soybeans in the summer of 2022, “La Nina” is going to be one of those things.
Steve Kell operates a crop farm in Simcoe County and is a former grain merchant for Parrish and Heimbecker Ltd.
