In a global commodity marketplace where grains and oilseeds are sold around the world, an interruption in trading patterns has significant consequences for everyone involved. This is certainly the case for Canadian soybean producers who have inadvertently faced the negative impact of the U.S. trade war with China, and its direct impact on our oilseed industry.
Between Sept. 1 and Dec. 31, 2017, the United States loaded 20.8-million metric tonnes of soybeans onto ships heading for China. Between Sept. 1 and Dec. 31, 2018 that number was 475,000 metric tonnes. That’s 2.28 % of the export volume done just one year earlier. In recent weeks, the Chinese have booked purchases of American soybeans, perhaps as a gesture of goodwill in their ongoing trade negotiations with the U.S.
Recently, U.S. Ag Secretary Sonny Perdue released data that as of Feb. 14, total U.S. exports and undelivered sales of American soybeans for the current crop year was 7,406,000 metric tonnes. The total volume of American soybeans exported to China in the 2017 crop year (Sept. 1, 2017 to Aug. 31, 2018) was 35.8-million metric tonnes. Even if the Americans are able to restore trade relations and resume significant exports of soybeans to China in the very near future, it’s unlikely that they’ll be able to reach 20-million tonnes of soybeans exports to China before the end of the crop marketing year.
If you look at the USDA’s supply and demand balance sheet for soybeans, their ending stocks at the end of the past marketing year was 438-million bushels (or 11.9-million metric tonnes). Their most recent projection of soybean ending stocks for the current crop marketing year is 900-million bushels (or 24.5-million metric tonnes). It’s both notable and not accidental that the increase in the size of soybean ending stocks is virtually identical to the change in the volume of soybeans being shipped to China. The Americans are going to export 13-or 14-million metric tonnes of soybeans to China this crop year, and their carry out stocks are going to increase by the same number.
Where there seems to be a disconnect in terms of expectations for the soybean market is that more than a few people seem to be clinging to the notion that as soon as a trade deal is announced between the United States and China, that the soybean prices will whiplash right back to the levels which they enjoyed before the trade actions were brought into place last year. While it will certainly be constructive to values to have the trade dispute behind us, logistics prevent a full or hasty recovery.
Let’s imagine that we owned a little diner on the main street of a small town. It’s a popular spot, and many of the locals will regularly stop in for lunch. Nine months ago, there was a fire in the kitchen and the restaurant has been shut down ever since while it’s undergoing repairs. The day that we finally re-open the diner for business, it will be great, and there’s no question that a bunch of the old regulars will be back for lunch, but nobody’s going to order the nine months’ worth of lunches that they got somewhere else while the diner was closed. That business is simply lost because we weren’t in position to do it. The situation is the same for American soybean producers. It will be good for business when the Chinese import tariffs are lifted, but it won’t instantly clear the backlog of surplus stocks that built up over the past nine months.
If the trade sanctions had been imposed in July of 2018, and then resolved prior to the start of last fall’s harvest, a full recovery would have been entirely possible. However the longer that this flow restriction lasts, the larger the volume of soybean stocks which will build up behind the tariff barrier. We’ve already reached the point where the interruption in trade will have a two-year impact on soybean prices and movement. In their March report, the USDA forecast a 160 million-bushel increase in soybean ending stocks for the end of the 2019 crop marketing year in September of 2020, even though in the same report they predicted a 3-million acre reduction in the number of acres being planted to soybeans. To have more soybeans left over in a crop year with less soybeans actually being produced is a consequence of backlogged inventory working its way into the market.
The challenge for Ontario producers is to develop an entirely realistic expectation about what prices are in fact achievable in this sort of a marketplace. If your sales price goals and crop production budgets are based on pre-trade war pricing, this is going to be a profoundly frustrating experience. It’s not a situation where farmers won’t be able to produce soybeans profitably. Fluctuations in both the commodity futures markets, and in currencies will create opportunities to lock in soybean sales at respectable values. Ontario farmers will simply need to be decisive and disciplined about marketing because the burdensome weight of dragging supplies will limit how high prices can bounce and how long those bounces can last.
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.