U.S. Exports to China Key to Soybean Performance

Dec 2, 2016

KANSAS CITY — The key to understanding both the pressures and opportunities in the U.S. soybean market in the months ahead can almost be boiled down to a single word:  China.

China is the behemoth overseas buyer of about 1 billion bus annually of U.S. soybeans, said Karl Setzer, market analyst at MaxYield Cooperative in West Bend, Iowa, accoun ting for more than half of total U.S. soybean exports.

In its Nov. 9 World Agricultural Supply and Demand Estimates report, the U.S. Department of Agriculture forecast 2016-17 U.S. soybean exports at 2,050 million bus.

“China is so important — they are the dog and we are the tail — whether we realize it or not,” said Bill Lapp, president of Advance Economic Solutions in Omaha, Neb. “During the past crop year, their monthly imports of about 7 million tonnes are the equivalent of what Indiana produces. So in a given month, they are taking the entire crop of the state of Indiana.

” Because Chinese demand remains so vital to the U.S. soybean market, two particular fundamentals need to be considered, the analysts said. One is the impact on imports during a time of slower economic growth in China. Another is whether the new Trump administration will make good on the campaign promise to renegotiate trade agreements that could affect U.S. dealings with export partners across the world, including Asia, although there is no trade deal with China involving soybeans.

There has been much talk that China’s stellar growth of recent years is slowing, but it is hard to know by exactly how much. The question is whether slower economic gains will translate to a slower pace of soybean purchases. China made the decision some years ago not to attempt to be self-sufficient in soybean production but to rely on imports for the lion’s share of the basic commodity central to the diets of their population and as protein for animal feed, the analysts said.

“China is very good at keeping everything they do quiet,” Mr. Setzer said. He said Chinese commodity funds recently have had their credit tightened by the government, which may mean the Chinese government is shorter on funds slated for speculative investments.

Mr. Lapp said he believes China will make sure enough soybeans and soybean meal will be available, even if economic growth takes a hit. “I would say one of the last things the Chinese want to do internally is make some sort of shortage or higher cost of feeding their people,” he said. “The greater risk would be a self-infl icted wound, where we would put up some impediment to trade with them.”

That is a legitimate fear in the market, given President-elect Trump’s pledge to renegotiate trade agreements, said Mr. Setzer.

“We’ll be keeping a close eye on this,” he said, noting that any changes in regulations affecting China’s ability to import U.S. soybeans may have a negative effect on U.S. export demand. He said, though, that he believes the person appointed as the new Secretary of Agriculture will be important in setting the agenda on trade of agricultural commodities, and that person might be more inclined to free trade than campaign rhetoric may have indicated.

Another wrinkle is the fact that China has put anti-dumping duties on U.S. supplies of distillers’ dried grains with solubles (D.D.G.s), which have signifi cantly reduced U.S. export sales of the animal feed ingredient. “

Domestic (soybean) meal use has got the potential to grow, but it will initially have to face the challenge of more D.D.G.s being marketed in the United States rather than overseas,” Mr. Lapp said.

Meanwhile, the United States’ largest soybean export competitors — Brazil and Argentina — are experiencing a near-perfect beginning to their new crop year.

“They have had phenomenal weather so far,” Mr. Setzer said. “It’s been a little bit dry, and that’s good.” He said the outlook for the crop is “the best it has been in a few years,” which could put some downward pressure on U.S. soybean futures in coming months.

Still, despite a cluster of unknowns, the outlook for the soybean market in the United States is a picture of bountiful supplies and remarkably good demand, with analysts predicting prices will likely stay in the current trading range until the South American crop is harvested. The fact 2016 U.S. production was estimated record high at 4,361 million bus has meant soybean values have moved signifi cantly down from pre-harvest highs, but at the same time they have been able to keep from swooning under the weight of available supplies.

“We’ll watch changes in the value of the dollar, but it would appear to me that this is maybe the second or third year where we have had a good bid in the market for soybeans and soybean meal, and that is supporting prices,” Mr. Lapp said. He said he sees soybean futures holding above $9.50 a bu and soybean meal staying at $300 a ton or higher for an extended period.

Before the South American harvest gets under way in the spring of bearish factors for 2016-17 have been priced into the market.

“Going forward, the supply-and-demand situation for 2017-18 will not be as bearish as in 2016-17,” Mr. Meyers said.

Mr. Meyers said wheat futures may continue to trade sideways for the next couple of months, although a lot depends on the condition of winter wheat as it enters dormancy. He suggested in the fi rst quarter of 2017, the average trade in the Kansas City March future may be between $4.25 and $4.40 a bu. The Chicago March may trade 5c below K.C.  March, and the Minneapolis March may trade 90@100c above.

“When you have such a carry in the marketplace, you have to say, if nearby Chicago wheat is worth $3.95 a bu, then next year’s July wheat at $4.44 a bu is just too high,” Mr. Freed said. “Then you look at Kansas City wheat at $4.04 for nearby compared with July 2017 wheat at $4.46, and again, $4.46 just seems too high. The U.S.D.A. said they thought the average farm price (in 2016-17) was going to be about $3.70 a bu. Last year, it was $4.89. So, they’re still looking for a trend of lower prices.

” Minneapolis futures presented a different story, though, as carrying charges were much more narrow than in the other markets.

“So we’re seeing more potential for downside risk in Chicago and Kansas City, assuming weather is normal, than you do in Minneapolis,” Mr. Freed said.

Bakers’ flour coverage for the fourth quarter was nearly completed, and January-March flour coverage was at about 30%. These estimates refl ected completed fl our bookings. Bakers’ commitments to contracts — reflecting completed bookings and component positions, primarily futures, committing bakers to contracts with particular suppliers — were even more extensive.

While many bakers have extended their futures coverage beyond March, others remained reluctant to “buy into the carry” and held back. With flour prices at the lowest levels in years, bakers were expected to book at their own pace, unless weather jars the market and requires a more aggressive posture.

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