OPINION: South American soybean production down, China’s soybean demand up; both good news for Ontario

Over the course of the COVID-19 pandemic, it seems as though the markets have been awash in bad news regarding either waning demand, confounded supply chains, or both. However, since we all have a requirement to run agri-businesses in Ontario in 2020, the most constructive thing for us to do is to concentrate on the opportunities which are emerging in the midst of this ocean of concern. There’s a hunting analogy that you can look at the trees, or you can look at everything that’s living around them. The opportunity hasn’t completely abandoned us through the spring of 2020.

Over the past few weeks, we’ve seen signs that the worldwide supply and demand scenario for soybeans is shifting in a way that provides some good news for North American producers. South American soybean production failed to actually meet its pre-harvest size projections, and Chinese demand is steadily increasing. Those two factors combine to create a marketplace which is different than the one we might have anticipated this past winter.

Throughout our fall and winter, the expectations for South America’s 2020 soybean harvest were extremely big. However as the growing season progressed, drier weather caused lower yields in the areas with later soybean flowering periods, and as final yield reports became available, production figures were reduced for both Brazil and Argentina. Brazil dropped its 2019/2020 soybean production estimate to 120-million metric tonnes. Argentina’s grain exchange made an even bigger adjustment to its 2019/2020 soybean crop reducing it by 2.5 million tonnes to 49.5 million tonnes for the year.

While we have yet to see a price bounce by late April in North American soybean prices in response to the reductions in final crop size from Brazil and Argentina, it’s still profoundly contractive news.

One of the key issues with soybean prices throughout 2020 has been a severe weakness in South American currencies. On Jan. 1, the Brazilian Real was trading at US $0.2469, and the by the end of April it had fallen to US $0.18, a decline in value of about 25 % in four months. The Argentinian Peso has dropped from US $0.165 to US $0.15, (or 10 %), over the same four-month period. As Canadian farmers, we’re all entirely familiar with how much the impact the exchange rate has on cash soybean prices. If the Loonie had declined 25 % (let’s say from $0.80 to $0.60) so far in 2020, the board bids at local elevators would be eye-popping. We shouldn’t be surprised that South American farmers are willing sellers of soybeans at today’s prices based on their currency situation, but the most important fact to bear in mind as a Canadian producer, is the fundamental reality that Brazil and Argentina simply have fewer soybeans available to sell.

The single-most encouraging development in the global soybean market which we’ve watched develop over the past few months, is a significant uptick in Chinese demand. In 2018, we saw the volume of soybeans that China imported drop by a walloping 11.5 million metric tonnes, from the 94 million they imported in 2017, down to 82.5 million in 2018 as African Swine Fever devastated China’s hog population, and demand for soymeal as a protein source in pig feed plummeted. This sharp reduction in Chinese soybean demand extended right through to the later months of 2019, where we began to see a steady increase in month over month soybean imports, and that trend has continued through the first four months of 2020.

Soybean growers should be pretty excited that China appears to at least have one major viral epidemic, African Swine Fever, behind them. Many analysts are now anticipating that China’s 2020 soybean imports could stretch back to 90-million metric tonnes. While that’s not quite the 93 million or 94 million that we saw in 2016 and 2017, it’s a substantial increase and represents a recovery of two-thirds of the end-use soybean market that was lost when China’s swine epidemic was at its worst.

The commodity markets are essentially a supply and demand play. With a poor finish to the growing season, southern Brazil and northern Argentina have failed to fully reach their soybean production targets for the year, and as China’s hog herd recovers from ASF, demand is returning in the world’s biggest soybean market. When you combine a 3.5-million tonne decrease in South American production and a 3.5-million tonne increase in Chinese consumption, we’re approaching a 7-million tonne shift in the bottom line of the world’s soybean balance sheet. That won’t solve all of the market’s problems, but it’s certainly a step in the right direction.