The U.S. and Brazil are Vying to Meet China’s Soybean Demand

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The U.S. soybean market is seeing continued strong Chinese demand, while Brazil struggles to bring in its oilseed harvest. Unexpectedly high Chinese demand is drawing down already-tight U.S. supplies, propelling CBOT U.S. soybean futures prices to nearly seven-year highs. The strong gains will likely influence U.S. farmer planting decisions when sowing kicks off in a few months.

But one agricultural analyst says farmers and other market participants should consider not just tight U.S. supplies and China’s appetite for beans, but also the size of Brazil’s coming harvest and lackluster oilseed demand from the rest of the world.

Another Record Crop

Although Brazil’s harvest is delayed, the country is still forecast to reap a record 133 million metric tons this season, according to the U.S. Department of Agriculture. That harvest is double Brazil’s output in the mid-2000s, says Emily French, founder of Global Ag Protein.

“They're going to have another record crop period, full stop. The only question is to what degree,” she says.

With greater supply on the horizon and demand uncertain, the current strong prices may not last, she adds. 

The U.S. Soybean Picture

In USDA’s February WASDE report, the agency estimated ending stocks at 120 million bushels, or 3.25 million metric tons, significantly smaller than the last two crop years. The marketing year started with smaller beginning stocks, while both crush and exports are forecast to be higher than years’ past. Estimated exports are particularly strong for the current marketing year as USDA pencils in the higher-than-expected Chinese demand, putting total exports at 2.25 billion bushels versus 1.682 billion in 2019-20.

U.S. estimated ending stocks of 3.25 million metric tons is 3.9% of world stocks, the lowest level since 2013-14, and this outlook has driven CBOT U.S. soybean futures prices higher.

However, French notes, don’t rule out imports to make up the shortfall. In 2013-14, the U.S. imported nearly 2 million metric tons, and USDA forecasts the U.S. will buy just under 1 million metric tons in 2021.

With the U.S. supply so tight, the world soy supply cushion for 2021-22 is down by 15.6 days versus last year, at 82.6 days of consumption available. While that seems dramatic, French points out over the past 20 years this is an average cushion.

“It would look a lot different if Brazil did not have a record soybean crop coming into the pipeline. And it would also look very different if China hadn't bought 21 to 22 million more tons of U.S. soybeans this year than last year,” French says.

Brazil's Dominance Grows

Several years ago Brazil took the U.S.’s crown as the world’s top soybean producer and exporter. In crop year 2019-2020, Brazil accounted for 37% of global soybean exports, significantly above the U.S.’s 29% global share, French says. This structural change led to the recent creation of a CME South American soybean contract, even though the CBOT U.S. soybean contract remains the global benchmark.

The U.S. and Brazil compete in the global export arena, but their different growing cycles allow the two countries to increase production. Brazil usually harvests soybeans around March while the U.S. harvests in October and November. Brazil tends to supply Chinese soybean demand from March through October, and the U.S. sells soybeans to China from October through March.

China Dominating Global Trade

China’s soybean demand is significantly stronger than even recent market expectations as the nation seeks to secure food supplies and build domestic reserves. “China has completely changed the import game for Q4 2020 and certainly into 2021,” French says.

China’s soybean imports represent 61% of the global world trade between 2019-21, she points out, and China’s aggressive buying increased its stocks-on-hand to 34% of the world’s soybean stocks, a record allocation of soybeans.

Their buying spree may not last, as French notes the USDA is forecasting an increase of only 1.5 million metric tons for China next year.

More troubling, French says, non-Chinese demand looks anemic as the USDA forecasts global imports to grow by 55,000 metric tons.

This tepid demand is forecast to occur just as a record Brazilian crop is expected to hit. Although harvest is delayed now, eventually Brazil will move those soybeans. Further, French says, Brazil’s logistics have improved significantly as they’ve finished the BR-163 highway and China is investing in Brazil’s rail capacity, too.

With U.S. soybeans trading near $14 as of mid-February, market participants need to ask themselves what will influence prices for the next six-to-seven months: the tight U.S. soybean balance sheet or the world balance sheet? French says market participants need to consider how Brazilian farmers could respond to high U.S. futures prices, especially with a sharply lower Brazilian real.

“The last time soy futures were near $14, Brazil increased its own domestic production by 40 million tons,” French says. And that was when the real was 2.5 to 1 and now it's 5.3, 5.4 to 1. So we're looking at massive expansion coming out of Brazil in ‘21-‘22.” 


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