By Geoff Geddes
Weather forecasts are free of charge, and often you get what you pay for. Soybean market forecasts are also free, but the results can be priceless. As they reflect on 2016 and look forward to the New Year, soybean analysts are serving up some guarded optimism with a sprinkling of caution.
That’s the viewpoint of Neil Townsend, Senior Market Analyst at FarmLink Marketing Solutions.
“Broadly speaking, 2016 has been surprisingly strong with record soybean production globally as well as in the United States and Western Canada,” says Townsend.
While part of that is thanks to good yields, the main factor is increasing soybean acres in response to growing demand.
“The big story in agriculture this year was the tremendous demand for oil seeds, soybeans, canola, and vegetable oils. Because demand growth has kept pace with production success, we haven’t seen the big market decline that sometimes follows a spike in supply.”
That growth can be attributed somewhat to biodiesel mandates in North America and Europe; for Townsend though, that’s just the “cherry on the sundae.”
“The really important causes are underneath the cherry. Around the world, people are eating more meat, which needs to be cooked in vegetable oil. There are also more prepared foods out there that contain oils.”
One country that is helping to drive the demand for meat, and thus for oils, is China.
“They are ramping up pork production and buying large quantities from Canada, the U.S., and around the world,” says Alan Kluis, president and managing partner of Kluis Commodities in Wayzata, Minnesota.
“Pork is the preferred meat in China and as employment rises, people can buy more pork.”
Increases in meat consumption offer a two-fold benefit to the soybean market, as those extra animals are eating meal, which further boosts the demand. Whereas last year “meal was the rock star” according to Townsend, this year it’s oil grabbing the spotlight.
The crystal ball game
Looking to 2017, Townsend has high hopes but mixed feelings.
“In general, there will still be a growth in demand, though I’m not sure if the increase will match those of the last six or seven years. This year, the U.S. sold 38 percent more soybeans than in 2015, and I don’t see similar growth going forward; it may be more in the 6 to 7 percent range.”
“My concern is that if there’s successful soybean production in Brazil and Argentina in the first few months and you combine that with the U.S. plans for record acreage, we will have more soybeans than we’ve seen in the history of humankind.”
At some point, it just stands to reason that supply will outpace demand and may trigger a market correction. What’s unclear at this point is the timing and severity of that adjustment.
“This year a lot of people predicted a big drop in futures values for soybeans to under $9. That never happened, and we’re sitting at around $10.50 right now, largely due to increasing demand.”
For Western Canadian soybean producers who anticipate decent yields next year, they stand to make a tidy profit and thus are likely to plant more. At the same time, Townsend said 2017 will not be spared some uncertainty.
“Right now, we are motivated by the fact that there is so much demand out there and we need to keep feeding it. Once people start to perceive an overabundance, though, they’ll have less willingness to pay for it, and when you do the math on soybeans, it’s not hard to see that happening.”
That view is shared by Kluis.
“With soybeans and canola currently offering greater profits than spring wheat, I think you’ll see a large increase in acreage for those two crops. If we end up combining that with normal weather, it could have a negative impact on price.”
Given the volatile nature of a weather-driven business like farming, producers should be happy to hear the sunny forecasts, at least for the short term. And the longer they can enjoy cloud-free skies and markets, the happier they’ll be.