🔎 In MY 2021-22, USA's soybean production was the highest on record and global soybean production was the third highest on record. Despite soybean supplies being near historic heights, prices have also soared. How can we understand such unprecedented demands? Learn more about the situation through our episode.
🎙 Tridge's Global Market Analyst Theo Venter joined us to share his insight into the situation.
📖 For more information on today’s episode, read our article on high soybean demand here.
💻 Want more agricultural insights? Get smarter and stay updated on the most important agricultural updates on https://www.tridge.com/intelligence-data.
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0:16 Today, we're discussing the fact that soybean prices in the US are to remain near historic heights.
0:21 This is despite higher than ever production volumes in the US
0:25 A similar phenomenon has also been married globally despite high global production prices have remained high.
0:32 What kind of unprecedented demand is keeping prices so high?
0:36 Theo Venter, a Global Market Analyst, is joining us today.
0:42 Hey Theo thank you for joining us today.
0:45 Hi Bea, yeah thanks for having me.
0:48 So you wrote two very interesting analyses on soybean production demand and prices: 0:54with one focusing on USA production and prices and the other focusing on world production and consumption.
0:59 Let's work on understanding the first one.
1:03 the US had a record crop in the 2021-2022 Marketing Year.
1:06 Why are prices so high?
1:09 Yeah they had one of the best crops, well the best crop on record but there were a lot of external factors pushing prices much higher.
1:18 I mean we all know about the war going on in Eastern Europe.
1:21 So Russia and Ukraine are both very big sunflower producers and sunflowers are also used in the oil market
1:29 just like soybeans.
1:30 So that's one of the things that push prices higher.
1:33 Another one would be inflation – inputs for farmers are higher.
1:37 So, you know, that also drags the producer price higher.
1:42 And then a major one is with the economy recovering, there's a big demand for food oils and edible oils.
1:50 So, a lot more people are going out to restaurants, a lot more people are eating outside.
1:55 So, this is pushing demand higher
1:58 and pushing prices higher and these are mostly external factors.
2:03 They're not inside the US
2:05 Although inside the US
2:07 Of course the demand for edible oils is also picking up.
2:11 So they had a record crop, but still the demand for oil and then of course soybean oil is really high inside the US.
2:20 With the inflation comes something interesting.
2:23 With the inflation
2:25 A lot of households I prefer eating protein that is relatively cheaper.
2:31 So they would switch from beef to something like chicken or pork. And chicken and pork:
2:37 A very important feed ingredient for chicken and pork is soybean meal.
2:42 And there's not really a lot of alternatives because soybean meal has a very high protein content.
2:47 If you use sunflower meal or rapeseed meal or something like that, you don't get the same growth, especially in the broiler market.
2:56 So, you know, with people switching to eating more chicken and less beef, it also increases the demand for soybean meal.
3:04 Yeah that makes a lot of sense.
3:05 There was another reason you touched upon in your analysis: how does the biodiesel mandate plan into soybean prices?
3:13 There are mandates set by the US government that says, you know, a certain portion of fuel should be from renewable sources.
3:21 So, that would be a lot of ethanol coming from the corn or the maize market.
3:26 And then a lot of biodiesel coming from the soybean oil market.
3:29 Now, currently, I think The US mandates are for about 21 billion gallons should come from renewable sources in 2022.
3:40 So, with this being the law, a lot of oil products would go into the biodiesel market.
3:48 So, soybeans just being the biggest one, by far – it's a lot bigger than for example sunflowers in the US
3:56 Or any other oil seeds.
3:57 So with this being the biggest one, it's also the obvious choice for biodiesel.
4:02 So, a little less than half of all the soybean oil being produced in the US
4:07 Goes into the biofuel market.
4:10 So, you know, it's quite a big portion of the soybean oil market.
4:15 And then of course the more that goes into biofuel, the less is available for food oil or edible oil.
4:21 And you said you found this information in the
4:24 USDA March Estimate
4:25 I'm assuming that this report also had to do with the prices that we see right now.
4:30 Yeah, so this is one of the reports that gets watched very closely and it comes out monthly.
4:37 So, it's called World Agricultural Supply and Demand Estimates.
4:41 So every month the USDA, they released this report. Obviously because it's a US entity, it's very US-focused.
4:52 So, the United States have their own section where it's a detailed supply and demand of the US Crop
4:59 And it's for most commodities: from rice, oilseeds, feed grains, wheat all the way through
5:05 So this world agricultural supply and demand estimate
5:09 comes out monthly. And it also gives some of the big producing countries
5:14 It will also give some details into their crop
5:16 So, for example, in the soybean market it will show Brazil, Argentina; it will show China 5:23which is not a big producer but a very big importer, also the European market
5:27 So it's a monthly report and many people will have their own estimates
5:32 But I think this is kind of the benchmark because the USDA has a lot of resources
5:39 they can use. Their estimates are pretty accurate.
5:41 Market prices usually move around what's being said in these reports.
5:47 So, their monthly reports and they're watched very closely.
5:50 I see.
5:51 So it sounds like a consistently watched report for production estimates. According to your analysis, you then looked into crush margins to understand where prices have risen.
6:01 What goes into the calculation of a crush margin and what do they indicate?
6:05 Yeah, of course.
6:07 Soybeans, when they get harvested, about 95% – probably even more than that – of soybeans gets separated into the oil component and the soybean meal component.
6:18 So, it means that oil gets extracted from soybeans.
6:22 And then we talked about the demand for these oils from the biodiesel market and also from the edible oil market.
6:30 But the other product that comes from this is the part that's leftover, which is called the soybean meal.
6:35 So the soybean meal, we also talked about this very important feed ingredient with high protein going into poultry and pork.
6:42 So, this whole process of separating oil from the rest of the soybean is called crushing.
6:49 So it's crushing.
6:50 The soybeans
6:53 So, basically just comes down to separating the oil from the rest of the soybean and then you get these two products.
6:59 So you get the oil and you get the meal. Now crush margins, to explain it in a simple way,
7:05 would be like if I pay for the soybean or how much do I pay for the soybean?
7:10 And then I split it into these two components, and then if I sell these two components, 7:16how much money do I get. If I get more by selling oil and meal than I paid for the proportionate amount of soybeans.
7:25 That means I have a positive crush margin.
7:27 The higher the prices of meal and soybean oil, compared to the raw soybean,
7:33 the higher the crushing margin
7:35 Now, just looking at the factors that we’ve laid out right now, a lot of them are external factors pushing the
7:40 US Prices to rise.
7:42 What do you think would be the case if these factors ease what would prices look like by Q2 or
7:50 because it's an annual crop,
7:52 Soybeans get planted in the U.S.
7:54 Usually planting starts from about May and then it gets harvested in October.
7:59 So let's say the last time the US had their very own fundamentals was when the crop was still on the land.
8:06 So let's say from after the harvest, we know the total supply in the US, and then it shifts more to taking a look at the demand side.
8:16 So the demand side is what's driving prices and a lot of external factors.
8:22 But in about two months, the US, they're gonna start planting their own crop again.
8:28 So then, the focus will be back on the supply side from the US
8:33 Now, it's hard to predict all these factors. The external factors –
8:38 I mean, oil prices worldwide are high.
8:43 It pulled back a little bit; we've got the ongoing war in Ukraine and Russia, which is underpinning prices of basically all oilseeds.
8:51 We've got strong demand for edible oils coming as the economy recovers
8:56 which I think will continue.
8:58 And then also strong demand for soybean meal, animal feed.
9:04 So, I think that's also going to continue.
9:06 And then the focus is going to shift more and more to the domestic fundamentals in the US
9:10 So they've been plagued by drought for, you know, more than a year now
9:16 and there are less than two months to go before they need to start planting
9:20 in the Midwest, it's dry and soil moisture is really low.
9:24 So, if you're planting soybeans with low soil moisture, you know, it doesn't get off to a good start
9:30 If conditions remain dry over the Midwest, prices will obviously keep finding support even without the external factors
9:40 the weather will play a massive role: if the Midwest get some good precipitation before may and the external factors slowed down or the external demand slows down
9:50 that could bring prices down.
9:53 But at the moment, I would say most fundamentals are keeping prices at these high levels of about $16, $17 a bushel.
10:02 In your second analysis, you extend your perspective to the global sphere.
10:06 I'm going to ask you the overarching question that guides your analysis
10:11 as was the case in the US,
10:13 world production was pretty high on record, but why are prices still so high?
10:18 Yeah, of course.
10:19 the world production has increased and even the crop that's getting harvested now in the Southern hemisphere,
10:27 it's counted together with the US crop that was harvested in October
10:30 So that would be the 2021-22 world season.
10:34 So, this crop is the third highest on record.
10:38 So, it's a big crop
10:40 but supply is increasing.
10:42 World production is increasing, but the world demand is increasing comparatively more.
10:47 So, that's basically what it comes down to now.
10:50 We've talked about all the uses of soybeans and their by-products.
10:54 So the edible oil market, the biodiesel market, the animal feed market for soybean meal.
11:01 So they're not really a lot of alternatives in terms of soybean meal.
11:07 Alright, so some of these are substitutes, so you can replace soybean oil with sunflower oil or palm oil.
11:15 And then also the prices are quite related to crude oil, because crude oil gets made into fuel.
11:22 And then of course soybean oil gets made into biodiesel, which is also fueled, so that's related.
11:28 But on the soybean meal side, because of the high protein content of about 45%, you can't really use anything else
11:36 unless you're switching to something like bone meal or bleed meal, but there's no other vegetable or let's say a field crop that can give you the same kind of protein content.
11:46 So, it's quite a unique product which the world is using
11:51 like people are eating more and more chicken if you look at the world trends.
11:54 So, it’s been a very important feed ingredient – there's not really something else you can use for that.
12:01 Now, there are a lot of substitutes for soybean oil, but the demand for all kinds of edible oil over the last six months or so has just been massive.
12:13 So, we've seen shortages in palm oil, sunflowers, obviously, as the Eastern Europe war going, and then, you know,
12:26 some of the other options would be something like flaxseed oil, or canola oil, or rapeseed.
12:32 So, soybean has a very unique market and a very strong foothold in the marketplace.
12:39 So, you know, it can't really be replaced by anything else.
12:43 So, just by virtue of how finite land available for production is on earth, it's hard to drastically increase soybean production to meet demand.
12:52 Is there a precedent, perhaps, in which production area may have drastically increased or novel technology helped increase soybean production?
13:01 Then we should probably look at Brazil in this case
13:06 because they kind of showed the way things happened
13:08 And that's why in my analysis, I compared it to 2012 and what we're seeing now.
13:13 So in 2012, there were also really high prices
13:16 and it's also like there needs to be an expansion under area under soybeans.
13:21So not just the yields, but also the area needed to expand.
13:24 Now there were very few countries that were able to expand their area
13:29 the exception being Brazil. Brazil, they basically doubled the area under soybeans from 2012, but obviously, there are some repercussions to that.
13:38 So it's not like the land was just available somewhere.
13:42 A large part of it was, they had to encroach on the rainforest, you know, clear some land to be able to plant soybeans.
13:50 If we're saying the soybean production is having a hard time keeping up with world demand,
13:57 not just yields need to improve, but we also need to find more area under soybeans, 14:02The question still remains like “Where is this going to come from?’ and like the only option it seems would still be in Brazil
14:11 I see, so more production has come from Brazil, but Brazil seems to still be the only viable solution for an increase in production.
14:18 That's right.
14:19 They overtook the US in 2017
14:22 so they overtook the US because they increased the area under soybeans so much.
14:28 But like I said with these increases
14:30 like it has to come from somewhere and most of it
14:33 unfortunately, has to be in the rainforest in the Amazon basin.
14:37 So that's the most viable solution to increasing soybean production in the world.
14:44 But of course, there are many negative effects to this also.
14:48 Well I think we're nearing the end of our time together.
14:50 Are there any last comments you would like to add?
14:53 Yeah, maybe one part that we didn't talk about.
14:56 So, before soybean prices made a record, about in December, before the crop was planted in South America
15:07 Actually the crop estimates were pretty high.
15:09 So for world production, the estimates were about 377 million metric tons.
15:17 Now if that was the case, world production would have been more than world consumption this season.
15:24 But these estimates were made on expecting high yields, expecting yields to improve every year in other countries now.
15:32 I mean, that that is kind of realistic given that we talked about precision farming and 13:37the technologies improving the varieties of soybeans being planted, things like that.
15:42 So, definitely, yields will improve over the long term.
15:46 But with climate change or there are a lot more years where yields dropped far below, 15:53 let's say the baseline or the expectations where they should be.
15:57 You know, if climate change gets worse,
16:00 obviously yields won't increase as much as expected.
16:03 That's really interesting.
16:04 So as you said, this year might be a signal that prior forecast models
16:08 based on historical data might be losing their precision because of climate change
16:13 or that other factors are playing into production that we might not have been aware of in the past.
16:18 Well, Theo, I had a great time speaking to you.
16:21 Thank you so much for your time today.
16:22 Yeah, thank you so much, Bea.
16:24 it's always interesting to talk about this and yeah, see what, what is happening in the world market.
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