August 14, 2018
Michael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist
In an odd sense, soybean farmers should feel honored that they are being targeted by the Chinese in retaliation for the tariff dispute with China. Why is this? Soybeans represent one of the only identifiable products and sectors that the Chinese can target. Soybeans accounted for 50%, or more, of the agricultural exports to China annually. It isn’t like the Chinese can stop importing or tariff all sorts of different U.S. agricultural or manufactured products in a significant manner, since they were never importing them in a big enough way to impact the trade flow. No doubt, other crop farmers are being hit by the Chinese response, and they feel that they’re being targeted as well. However, in the end, they don’t end up on the front page of the newspaper because their collective impact remains under the radar.
Having talked to many soybean farmers this summer, I know for a fact that they don’t feel honored. They are simply upset with Chicago Mercantile Exchange (CME) prices that are in the sub-$9-per-bushel range. In some markets with a poor cash price, soybean farmers face close to $8 per bushel for cash prices. And, they know that $450 per acre of gross revenue won’t pay their bills.
So, exactly how much of the low prices faced are due to the trade dispute versus a simple oversupply of soybeans throughout the world? It pays to think about what it means to be over or under supplied at a particular price. Personally, since I travel so frequently, I feel the world remains undersupplied with brand new personal jets at the price of $100, but I doubt that jet manufacturers think the same way. They might think the world is oversupplied with new jets in the tens-of-millions-of-dollars range. The real issue of over or under supply requires a price point to be associated with it.
This year, the U.S. will produce another record large crop of 4.3 billion bushels or more of soybeans. The following charts show that U.S. farmers again planted 90 million acres of soybeans.
And, the crop rating through the end of July represents a well-above-average yield.
No one is afraid of running short of soybeans, so why would they offer a risk premium? Globally, since 2000, the major oil crops (soybeans, rapeseed/canola, and palm oil) increased their production by 5% annually while the global population has increased by 1.2% annually. How long can the oilseed market outgrow population by a 5 to 1 ratio? It isn’t enough to say that some people somewhere could use more protein and oilseeds. They most certainly could, but at what price? And, do the U.S. and other global producers want to produce these oil crops for that price?
More often than not, markets need a real shock to reevaluate their assumptions and move prices. The shock can come from either side ─ production or demand. The agricultural commodity market continues to go through a difficult debate of how much demand there really is at these current prices, and the bears and the bulls each have some strong points to bolster their arguments. The bulls always cite that population and income growth will support increased demand and higher prices. The bears talk about how rising crop yields and improved animal feed utilization force prices down.
In reality, all sides of the argument need to be evaluated simultaneously, and a depressing degree of uncertainty should be included as well. Personally, I think that prices will be flat to slightly declining for most agricultural commodities. The knock-on effects would be for land, seed, fertilizer, and machinery prices to be under pressure as well. Just how much pressure these sectors will come under depends on other factors as well, and investors and participants should not overreact. But, they certainly should have a game plan for dealing with a different price dynamic going forward.
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