There are too many Canadian farmers who think that if they patiently hold onto their crop until the Chinese tariffs are lifted, the soybean price will rally. Unfortunately, that’s only true if you are producing soybeans on the other side of the border.
In the current market situation, Canadian soybeans are the premium product. Our American neighbours are harvesting 4.692- billion bushels of soybeans, their biggest crop in history. It’s 9.4 % bigger than last year, which had been the previous record. With China being the world’s largest single demand market for soybeans, the current tariff has them all but locked out. Canadian soybeans are worth more than American soybeans and when the tariffs end, it doesn’t help our prices go up.
To be clear on this, the Chicago soybean futures prices are too low, and will bounce up if the Chinese trade issue gets resolved. Futures contracts are deliverable, and if you buy CME soybean futures, you can use them to take delivery of physical American soybeans in a delivery warehouse at various points in the U.S. heartland. Of course, the last thing that you really want right now is tariff-restricted American soybeans a thousand miles from an ocean port. Fund traders might also be able to make some quick money joining in a craps game in a dark downtown alley in the middle of the night, but in both cases, it’s apt to end poorly. Futures prices are based largely on the value of American soybeans, so when U.S. soybeans can flow into the marketplace normally again, we can expect the futures market to move back to the price range where you might expect to see them in a market with nearly 5-billion bushels of total supply when you add up this year’s new crop and last year’s ending stocks.
Basis is the price corrector between the Chicago futures and what the rest of the world wants to pay for soybeans. Right now, Canadian soybean basis levels are historically high, partially because they are correcting price against a U.S. futures market which is historically low, and partially because there’s a “tariff-free” premium on Canadian soybeans. As fast as the Chicago futures move back towards a normal price range at the resolution of this trade conflict, Canadian basis values will also slip back to more traditional levels as the pent-up flood of American soybeans washes over the world market.
One myth that’s popular amongst American soybean growers is that China needs U.S. soybeans, and therefore at some point, China will come to Washington on bended knee to work out a deal. But the reality is that this world has just as many acres of soybeans as it did before the trade war broke out, and it has the same volume of demand as it did last year. Tariffs do not impact either supply or demand; they simply scramble the logistics model of whose soybeans go where. In an unrestricted global marketplace, products move based on the most cost-effective shipping patterns (Ontario soybeans sail across the north Atlantic to Europe, and U.S. west coast soybeans sail across the Pacific to China because that’s the least cost of movement in order to reach the demand market). This fall, we have U.S. soybeans flowing into Ontario’s crush plants, and Ontario soybeans flowing east out the St Lawrence on their way to China. Nobody is about to run out of soybeans. We are just going to move them around in peculiar freight patterns until the tariff issue gets resolved.
Ontario soybean producers need to bear in mind that there is an enormous supply of soybeans in North America as a result of the 2018 crop. Ontario farmers will combine a little over 4-million metric tonnes of soybeans this fall, and American farmers are expected to harvest 127-million metric tonnes. To anticipate that a resolution to the U.S., China trade war will fix the soybean market is naïve. An end to the tariffs will certainly adjust the futures and basis relationship, but the enormous supplies are still going to be a burden on price. We’ve allowed all of the news about tariffs to distract us from the fact there there’s 110 % of last year’s North American soybean crop this fall. The Chinese tariff primarily impacts American farmers. Eliminating the tariff does nothing to reduce the enormous soybean supply.
If there’s a light at the end of the tunnel, it is that the early indications for 2019 soybean planting intentions are significantly lower. Informa’s Sept. 18 estimate of 2019 American planting intentions suggested that U.S. farmers might switch as much as 6-million acres of soybeans into corn and wheat next spring. If soybean prices continue to struggle, that number could even grow. It’s entirely possible that by early winter, the soybean market will trade on the anticipated 2019 crop acreage rather than the glut of the 2018 crop supply.
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.
