After years of plentiful U.S. domestic and global soybean supplies, things have changed significantly in 2020. Nearby soybean futures prices are testing $12 per bushel at this writing, which is the highest level since 2016.
The higher prices have also come along with higher price volatility. Current price volatility is at levels usually associated with the summer U.S. growing season when weather uncertainty drives volatility.
There are multiple economic conditions, both domestic and global, that are driving both higher prices and volatility.
U.S. Domestic Situation
U.S. soybean demand is robust as total use continues to grow. For example, USDA projects the 2020/21 U.S. soybean crush to be record large at nearly 2.2 billion bushels. This represents growth of over 15% over the past five years. In addition to this growth is a resurgence in export demand. Despite head winds caused by the U.S. trade war with China over the past two years, USDA projects export demand to recover to pre-trade war levels under the U.S. – China Phase One trade deal. AgResource estimates that the U.S. has exported 1 billion bushels of soybeans through November. The U.S. has never exported this quantity of soybeans in a single crop year quarter.
Meanwhile, U.S. production has disappointed the past two crop years. A cold and wet spring in 2019 resulted in the lowest U.S. soybean production since 2013 and late season dryness this past summer curtailed what was expected to be a healthy 2020/21 crop.
Combining growing domestic consumption and rebounding exports with smaller than expected production has resulted in significant consumption over production the past two years. Just two years ago the U.S. domestic stock-to-use ratio set a record at over 20 percent. The November 2020 USDA WASDE report projects that 2020/21 stocks-to-use will dip below 5 percent, the lowest stocks-to-use ratio since 2013. AgResource notes that, for November WASDE reports, the projected U.S. stocks-to-use ratio is the lowest in history.
The Global Situation
Global production in 2020 has already exceeded global production of the past two years. A developing La Niña weather pattern also increases the risk for adverse weather events in South America. Argentina soybean production peaked in 2014 and returning to those levels will be challenging during a strong La Niña. AgResource reports that only two vessels are in the line-up to load soybeans as of the last week of November, which suggests that Brazil is nearly sold-out of old-crop soybeans. The market will be watching closely Brazilian weather conditions and any potential crop losses.
Global consumption also continues to grow. China is the largest consumer of soybeans and after several years of relative lackluster demand growth due to a smaller domestic hog population, Chinese usage is projected to be a record high in 2020/21.
Eyes on South America
Rising global demand along with smaller than expected production over the past two years is driving the lowest stock-to-use ratios in years. A large South American crop is needed to avoid rationing and the potential for even greater volatility. South American weather and a developing La Niña weather pattern will be watched very closely over the next few months. Increased volatility is likely to remain until more is known about the South American crop.
OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.
All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).
