Chip Flory: A Tough Spot for Soybeans

August 21, 2018 03:20 PM
 
Chip Flory

The fundamental story on corn is still bullish. Even if the 2018 national average corn yield is 1 bu. to 2 bu. above trendline, total supplies and total use will match up well to prevent an increase in 2018/19 carryover. And the fundamental story for corn on a global scale is even more price-friendly with total consumption expected to outpace global production by about 40 million metric tons (MMT). Wheat has a positive story (maybe not bullish) to tell on a domestic and global basis as well.

Soybeans, on the other hand, are in a tougher situation. Global soybean fundamentals did an about-face when 250 million bushels were cut from expected 2018/19 U.S. exports in the July supply & demand report. Chinese soybean imports fell from an expected 103 MMT (about 3.8 billion bushels) to 95 MMT (about 3.5 billion bushels). USDA analysts argue the higher-priced Brazilian soybeans and tariff-laden U.S. soybeans will encourage Chinese feed makers to find alternative protein sources. Instead of a year-to-year downturn in global soybean stocks, USDA now sees a slight uptick.

The longer the Chinese tariffs on U.S. soybeans remain in place, the higher the odds USDA’s outlook will be correct. However, a relatively quick resolution of the trade tiff with China could prevent the demand destruction, reopen the flow of U.S. soybeans to China and return the global soybean outlook back to “slightly bullish.”

If the conflict with China persists into the fall, Brazilian producers are likely to respond with at least 3% to 4% more soybean acres for 2018/19. The one thing that could force Brazilian producers to rethink expansion is the recent truckers’ strike. Truckers basically got what they asked for—a doubling of freight rates. It now costs Brazilian producers as much as $3 to $4 per bushel to move soybeans from Mato Grosso to the Port of Santos.

In the long-run, truckers in Brazil might be putting themselves out of business. Watch for private sector (including farmers) investments to finish long-delayed rails from the interior to port locations. If that happens and tariffs persist, the U.S. will lose soybean demand, China will have access to more reasonably priced soybeans from Brazil, and Brazil will come out the winner by investing in its future.

In the meantime, Brazilian soybean prices have factored in tariffs and cost 20% to 25% more than U.S. Gulf soybeans. That means U.S. soybeans are “on sale” compared with the rest of the world—and they’re buying. Exports should top USDA’s estimate (2.04 billion bushels) even if Chinese tariffs remain in place deep into the 2018/19 marketing year.

Barring a 180-bu.-average corn yield, corn should work higher from summer lows. Wheat prices might move up as production problems in exporting countries attract demand for U.S. supplies. The soybean outlook is divided ... and emotionally driven.


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