China is the behemoth overseas buyer of about 1 billion bushels annually of U.S. soybeans, said Karl Setzer, market analyst at MaxYield Cooperative in West Bend, Iowa, U.S., accounting for more than half of total U.S. soybean exports.
In its Nov. 9 World Agricultural Supply and Demand Estimates report, the U.S. Department of Agriculture (USDA) forecast 2016-17 U.S. soybean exports at 2.050 billion bushels.
“China is so important — they are the dog and we are the tail — whether we realize it or not,” said Bill Lapp, president of Advance Economic Solutions in Omaha, Nebraska, U.S. “During the past crop year, their monthly imports of about 7 million tonnes are the equivalent of what Indiana produces. So in a given month, they are taking the entire crop of the state of Indiana.”
Because Chinese demand remains so vital to the U.S. soybean market, two particular fundamentals need to be considered, the analysts said. One is the impact on imports during a time of slower economic growth in China. Another is whether the new Trump administration will make good on the campaign promise to renegotiate trade agreements that could affect U.S. dealings with export partners across the world, including Asia, although there is no trade deal with China involving soybeans.
There has been much talk that China’s stellar growth of recent years is slowing, but it is hard to know by exactly how much. The question is whether slower economic gains will translate to a slower pace of soybean purchases. China made the decision some years ago not to attempt to be self-sufficient in soybean production but to rely on imports for the lion’s share of the basic commodity central to the diets of their population and as protein for animal feed, the analysts said.
“China is very good at keeping everything they do quiet,” Setzer said.
He said Chinese commodity funds recently have had their credit tightened by the government, which may mean the Chinese government is shorter on funds slated for speculative investments.
Lapp said he believes China will make sure enough soybeans and soybean meal will be available, even if economic growth takes a hit.
“I would say one of the last things the Chinese want to do internally is make some sort of shortage or higher cost of feeding their people,” he said. “The greater risk would be a self-inflicted wound, where we would put up some impediment to trade with them.”
That is a legitimate fear in the market, given President-elect Trump’s pledge to renegotiate trade agreements, said Setzer.
“We’ll be keeping a close eye on this,” he said, noting that any changes in regulations affecting China’s ability to import U.S. soybeans may have a negative effect on U.S. export demand. He said, though, that he believes the person appointed as the new Secretary of Agriculture will be important in setting the agenda on trade of agricultural commodities, and that person might be more inclined to free trade than campaign rhetoric may have indicated.
Another wrinkle is the fact that China has put anti-dumping duties on U.S. supplies of distillers’ dried grains with solubles (D.D.G.s), which have significantly reduced U.S. export sales of the animal feed ingredient.
“Domestic (soybean) meal use has got the potential to grow, but it will initially have to face the challenge of more D.D.G.s being marketed in the United States rather than overseas,” Lapp said.
Meanwhile, the United States’ largest soybean export competitors — Brazil and Argentina — are experiencing a near-perfect beginning to their new crop year.
“They have had phenomenal weather so far,” Setzer said. “It’s been a little bit dry, and that’s good.” He said the outlook for the crop is “the best it has been in a few years,” which could put some downward pressure on U.S. soybean futures in coming months.
Still, despite a cluster of unknowns, the outlook for the soybean market in the United States is a picture of bountiful supplies and remarkably good demand, with analysts predicting prices will likely stay in the current trading range until the South American crop is harvested. The fact 2016 U.S. production was estimated record high at 4.361 billion bushels has meant soybean values have moved significantly down from pre-harvest highs, but at the same time they have been able to keep from swooning under the weight of available supplies.
“We’ll watch changes in the value of the dollar, but it would appear to me that this is maybe the second or third year where we have had a good bid in the market for soybeans and soybean meal, and that is supporting prices,” Lapp said. He said he sees soybean futures holding above $9.50 a bushels and soybean meal staying at $300 a ton or higher for an extended period.
Before the South American harvest gets under way in the spring of 2017, “We’ll be stuck in a tight range because there’s not enough fresh news” and any bad news has already been mostly factored in, said Setzer.
Lapp said U.S. farmers were optimistic about the yield potential of soybeans in coming years after three consecutive years of exceptional yields.
“For us to have an average this far above trend, this hasn’t happened, I don’t believe, in a couple of decades,” Lapp said. He said his prediction for the 2017 carryover was about 425 million bus, below the November USDA projection of 480 million bushels.
“Either figure, the stocks-to-use ratio is the largest in a decade,” he noted.
Lapp was convinced supply and demand fundamentals will remain the most important driver for soybean prices, despite some influence from fluctuations in the U.S. dollar and performance in outside commodity markets.
Setzer saw price volatility ahead until more is known about the South American harvest. He saw some downward price pressure in the fact that ample supply of feed wheat is available around the world, which may decrease demand for soybean meal. But he doesn’t see any lasting major changes in current price ranges for soybeans and soybean meal. He especially thinks upward price potential is limited, given the likelihood of bumper South American crops.
