Forecast for U.S. Soybean Demand: Strong and Stronger

By James C. Webster • From Winter 2018 American Soybean Magazine

A year ago, at the U.S. Department of Agriculture’s (USDA) Agricultural Outlook Forum, the department’s top commodity analysts said that market fundamentals favored soybeans among the major crops, “particularly with expectations of continued growth in China’s soybean imports.”

The intervening year has provided nothing to change the bullish demand outlook for soybeans and soy products. If anything, demand prospects have improved to the point that USDA now expects soybean acreage to equal corn acreage in 2018 and sees soybeans planted on more land than any other feed or food crop in 2019.

The forecast for 2017 contrasted the positive soybean outlook with “only moderate growth in corn used for ethanol production and strong export competition from Argentina, Brazil and Ukraine” and tough competition for wheat exports. That translated into projected record soybean planted area but declines in corn and wheat acreage.

USDA’s long-term projections see 2018 and 2019 soybean planted area at 91 million acres each and 2018 corn plantings at 91 million acres, falling to 90 million acres in 2019. The analysts see similar fundamentals continuing for the coming decade, with 2028 plantings of 91.5 million acres of soybeans, 87.5 million acres of corn.

“If realized, this would be the first market-driven acreage shift that resulted in more soybean acres planted than corn,” said John Newton, American Farm Bureau Federation director of market intelligence, who coined the term “King Soybean.” But “market driven” is the key qualifier; soybean acreage exceeded corn once before, in 1983 when the federal government’s payment-in-kind (PIK) program discouraged corn planting.

John Newton, director of market intelligence, American Farm Bureau Federation

Rabobank experts agree with USDA’s assessment. “We come to the same conclusion in modeling that we have done,” said Stephen P. Nicholson, vice president for grains and oilseeds with RaboResearch Food & Agribusiness, Chesterfield, Mo. The impetus is better demand and price – “a little more profitability for beans,” he said.

“Record U.S. soybean production is driving record exports,” USDA said in its November 2017 Outlook for U.S. Agricultural Trade, with annual total soybean export value up $200 million to $24.1 billion.

Projections for the coming season, and indeed those for the longer term, are predicated on what Newton calls “a business-as-usual environment,” as well as normal weather patterns and no significant disruptions in supply or demand from disaster or political decisions.

The China factor

Several factors underlie the positive demand outlook for soybeans, led by strong exports but also a healthy biodiesel market and meal to meet the growth in domestic meat and poultry consumption.

But among those, the Chinese market towers above all. “It all boils down to what China wants to do,” Nicholson said.

“We continue to see good demand from China,” he said. “One caveat, we will probably lose a little of market share because Brazil has big crop, and as long as currency rates favor Brazil. But that’s OK; it’s not going to be over the top.”

AFBF’s Newton said that China buys about 60 percent of the soybeans exported by the United States. “I can’t imagine a scenario where they wouldn’t, because the demand is so great,” he said. The Chinese are the largest pork producer in the world and will continue to need soybean meal to feed their swine, he said.

Just how important is China? The production of one in every four acres planted to soybeans is exported to China, making it a $15 billion market, said former USDA Chief Economist Joe Glauber, now a senior research fellow at the International Food Policy Research Institute (IFPRI). “It’s probably also the largest growth market in the world too.”

Yet amid the positive outlook, analysts are concerned that the evolving trade policy of the Trump Administration may be a cloud on the horizon. Nicholson said he was troubled by “rattling sabers over trade,” especially with regard to the North American Free Trade Agreement (NAFTA) and withdrawal from the Trans-Pacific Partnership (TPP).

Stephen P. Nicholson, vice president for grains and oilseeds, RaboResearch Food & Agribusiness

Spurning trade agreements that could expand markets for U.S. soybeans is “a dangerous precipice to go down,” Nicholson said, because agriculture is so heavily dependent on trade. Setting aside the implications for direct soybean exports, he said, it is important to “think about livestock–25 percent of pork and 30 percent of chicken are exported–if those two are hijacked, it would be very difficult. That would be pretty tough for the soy market.”

The expansion of trade agreements among other countries that do not involve the United States is another concern from a policy standpoint because U.S. exporters do not have the same favorable market access terms granted to some of its competitors, Nicholson said.

Paul Drazek, a former USDA trade negotiator now a partner in the Washington trade consulting firm DTB Associates, and Glauber also expressed unease with comments by some administration officials about the U.S. trade deficit with China.

Analysts’ concerns arise in part from the proposition by Secretary of Commerce Wilbur Ross and Peter Navarro, director of the White House National Trade Council, that pressure should be applied to China in order to shrink its trade surplus with the United States.

“It depends on how far they take their trade policy threats of retaliation against China,” Drazek said. Threats of trade actions against China with the intention of reducing Chinese exports to us could backfire, he said. “If we start such measures, it is widely assumed that China will find a way to respond. It may not be overt or explicit but it could reduce imports from the United States.”

He recalled former President Obama’s imposition of tariffs on Chinese tires early in his administration. “China found some sanitary and phytosanitary measure to cut off or substantially reduce its poultry imports. That could happen again,” he said, with retaliation against livestock and dairy exports affecting demand for U.S. soybeans.

“I would really be concerned if we were to see a huge trade war with China,” said Glauber, who was the chief U.S. agricultural trade negotiator during the Doha Round talks. “If there were to be some kind of tit for tat in terms of retaliatory tariffs, it would have a very large effect on U.S. soybeans.”

Joe Glauber, senior research fellow, International Food Policy Research Institute

A prohibitive tariff would have immediate impact,” he said. “Prices would react pretty harshly. I don’t think they (Southern Hemisphere exporters) could make up the difference. They have some ability to double crop but they have seen a lot of growth over last 15 years but nothing like what it would take to take over.” He added, “China is not going to shut off all trade but they could make it very painful.”

Newton pointed out that Chinese demand for soybeans is responsible for much of the rapid expansion in soybean planted area in North America as well as the Southern Hemisphere. “U.S. producers responded to these market signals by increasing soybean production by 130 percent since 1990,” he wrote. “Brazil and Argentina have been much more aggressive, expanding production by 579 percent and 396 percent, respectively.”

Glauber and Nicholson both spoke of the longer-term potential for increased soybean production and exports from the Black Sea region, principally Russia and Ukraine. Glauber pointed out that climate and land in the region are favorable to soybeans. “That’s going to mean something,” he said. Nicholson said any shift from wheat or other crops in the Black Sea region “could be a real game changer.”

Trade agreement factors

Drazek considers the possibility of pulling out of NAFTA a more immediate threat, worrying that the administration is making demands for new NAFTA provisions “that neither Canada nor Mexico could possibly accept. One of the objectives may be to make it impossible to negotiate a new agreement and give us an excuse to pull out.”

Paul Drazek, a former USDA trade negotiator now a partner in the Washington trade consulting firm DTB Associates

NAFTA withdrawal is one of what AFBF’s Newton called a “black swan” event that could suddenly roil markets and alter planting decisions. Others might be an unexpected slowdown in consumption, more favorable growing conditions in South America or a sudden increase in the strength of the dollar, making U.S. exports less competitive.

“Mexico is our second largest market for soybeans,” Newton said. “It is not insignificant but it is dwarfed by what China buys.” For the year ended in September, China bought some 36.6 million metric tons (MMT) of the 60 MMT of soybeans exported by the United States. Mexico bought 3.9 MMT. While a loss of the NAFTA market might have a short-term price-depressing effect on U.S. soybeans, its longer-term impact might be more harmful as other countries move to replace U.S. exports of protein products to Mexico.

Administration officials appear divided over withdrawal from NAFTA. Secretary of Agriculture Sonny Perdue is credited with helping persuade President Trump not to follow through with a plan to withdraw from NAFTA in April 2017, describing which U.S. states that would be adversely affected by the loss of agricultural exports.

Ray A. Starling, special assistant to the president for agriculture, agricultural trade and food assistance at the National Economic Council, told a group of farm policy veterans in Washington in October 2017 that of White House agricultural concerns, “at top of the list the one getting the most attention is agricultural trade.” Conceding that “our options have narrowed and they may narrow even further, which is not a good thing for agriculture,” he said his job is to “make sure that others in the administration know that ag trade is so important.”

Public pushback from agricultural interests may shore up pro-NAFTA partisans in the administration. A coalition of more than 80 food and farm organizations wrote to Ross in October 2017 to challenge his assertion that a loss of guaranteed access to Mexico and Canada would not have a significant impact on U.S. agriculture.

“Should the United States withdraw from the NAFTA….Mexico likely will impose duties of 20 percent or greater on agricultural imports from the United States,” Dermot Hayes, Iowa State University agricultural economics professor, wrote in December. More than $12 billion of U.S. agricultural exports to Mexico in 2016 included some 10 percent of all pork production, 5 percent of poultry and beef and more than $1 billion in dairy products. He expects Mexico would quickly find alternative supplies from countries such as Argentina, Brazil, Canada and the European Union. Given the worldwide abundance of agricultural commodities, these countries will be more than happy to oblige.

The Nebraska Farm Bureau published a study in December asserting that U.S. withdrawal from NAFTA “would not only undercut Nebraska’s farm and ranch families, but harm the underlying foundation of Nebraska’s agriculture based economy.” The analysis shows that exports of soybeans and soybean meal to Canada and Mexico in 2016 were worth $1.28 per bushel of soybeans produced in Nebraska.

The U.S. Chamber of Commerce also is vocal in opposition to NAFTA withdrawal, observing that “Mexico is second only to China as an export destination for U.S. soybean exports.” Without the agreement, it pointed out, Mexican tariffs would rise from zero to 10 percent on pork and 75 percent on chicken–both major outlets for soybean meal.

The U.S. decision to forego participation in the TPP also troubles market analysts for its impact on soybean exports. “If we’re not at the table negotiating, we’re on the menu,” Nicholson said, adding, “We could lose market share” in some TPP countries.

TPP would have eliminated import taxes as high as 35 percent on soybeans and 40 percent on U.S. poultry products, according to a 2016 statement by the Office of the U.S. Trade Representative (USTR). Most U.S. farm product exports would have received duty-free treatment immediately, USTR said, including Japan’s 21 percent tariff on American soybean oil, $288 million of which was exported to TPP countries in 2014.
The National Oilseed Processors Association (NOPA) said that the United States exported $5.5 billion soybeans and products to TPP countries in 2014. Its 2016 statement said the TPP would help U.S. soybeans gain a competitive advantage over Brazil and help Argentina expand markets for U.S. pork, beef, poultry and dairy products, the U.S. soy industry’s largest customers.

Regulatory and policy factors

Agricultural policy analysts expect that the new administration’s regulatory policy shifts may prove positive for soybean demand and supply.

Chief among them is the November 2017 decision by the U.S. Environmental Protection Agency (EPA) to maintain the requirement of 2.1 billion gallons of biofuel in 2018 and again in 2019. “EPA wanted to take them down,” Rabobank’s Nicholson said, “but they got a lot of blowback from Midwestern senators and the administration quickly buckled. If biofuel supporters kick up enough fuss, I don’t know if the admin really wants to have that fight. With other regulatory issues considered more important at EPA, a fight over the renewable fuel standards “may not be worth [expending] political capital,” he said.

Farm Bureau’s Newton pointed out that advanced biofuels “are worth watching” as an indicator of soybean demand. “There had been some concern should they roll back advanced biodiesel,” he said. With more than 30 percent of soybean oil moving into biodiesel, he said, there has been “a market signal for a long time.”

Likewise, the administration’s approach to biotechnology regulation could be positive for soybeans. USDA announced in November 2017 that its Animal and Plant Health Inspection Service (APHIS) was withdrawing an Obama Administration proposal that had been criticized for regulating a wider range of biotech traits than necessary, thus increasing, rather than reducing, the regulatory burden for biotechnology. “Any lean to deregulation is going to be a little more friendly to biotech,” said Nicholson, potentially making it easier to win approval for new soybean biotech traits.

“The regulatory structure around trans fats is pretty well finished,” Nicholson said. “I don’t see much on that issue going forward” following the final determination by the Food and Drug Administration (FDA) in September 2017 to reduce dietary trans fats.

Nicholson sees crop insurance as the biggest policy issue in next year’s farm bill debate. “I don’t think there will be a lot of new money, if any,” for commodity safety net programs, he said. One potential “black swan” event could arise from an effort by farm program opponents to cut back on crop insurance or other safety net programs for soybeans and other program crops, but similar previous attempts have always failed.

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