Soybeans’ Biggest Year Begets Another

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Soy story

Soybeans were first domesticated in China roughly 3,000 years ago, and by the first century AD, their use was recorded across large areas of the Old World. Soybeans first came to the future United States in 1765, when farmers in the British Georgia colony planted seeds imported from the Far East. For about 150 years, Americans continued to grow soybeans, but regarded the crop as fit only for animals to eat directly. US agronomists in the 20th century developed processing methods to cleanly separate the soybeans’ oil and high-protein meal from each other, which made them significantly more valuable. Soy meal became an accepted part of most livestock and poultry diets in the US by the 1940s, but production remained low due to an overall lack of export demand.

Tables—and balance sheets—have turned dramatically since then. China now grows far fewer soybeans than it imports, and the world’s largest soybean producers (the US, Brazil, and Argentina) all compete to fill its demand. By 2019, the US will join Brazil and Argentina in sowing more soybeans than corn for the first time in history, according to recent projections by the USDA. With three of the largest ag exporters—both by volume and value—now prioritizing soybeans over traditional cash crops, the oilseed’s swift rise to the upper echelons of global agriculture is nearly complete.

The continued emergence of South America

Soybeans prevented a major food crisis when China’s emerging middle class started to prosper and consume more protein. South American farmers, recognizing an incredible opportunity, began planting more soybeans. Brazilian soybeans, in turn, satisfied China’s new demand without resultant deprivation anywhere else.

The ascendance of Brazil’s industry, the largest soybean exporter in the world, has not come without controversy. Few global campaigns in recent decades have been more visible than the one against the destruction of the Amazon rainforest, and soybean farming has historically been a major underlying cause. While anti-deforestation activists have had major victories in recent years, such as the 2006 moratorium on deforestation for soy fields, the global pressures to plant more soybeans continue to mount nonetheless.

Despite soybean export USD prices out of Brazil’s Paranagua port down roughly 10 percent since early 2017, the USDA projects total Brazilian soybean acreage to increase an additional 80,000 hectares, or 2.4 percent, in 2018. Meanwhile, infrastructure projects that were started years ago are beginning to conclude. Brazil’s ability to export more soybeans from the hinterlands will continue to slowly develop, regardless of the present federal gridlock. Domestic soy demand is also projected to rise alongside Brazil’s ever-increasing cattle stocks, according to recent USDA forecasts.

Outside of transportation bottlenecks, the health of Brazil’s economy could play an important role in the strength of its soybean exports. The IMF expects Brazil’s GDP growth to finally return to the black in 2017. Although a 0.3 percent growth rate is still languid, the Brazilian real has strengthened by about 5 percent since its 2017 low in June. It will be important to monitor any further appreciations in value, as large jumps could threaten the favorable exchange rates received by importers.

Hot and dry weather conditions have been a source of some concern for Brazilian farmers during this season’s plantings. Although temperatures have remained high, modeled rainfall in Brazil’s top soybean-producing state, Mato Grosso, indicates a return to normal conditions. Harvests won’t take place until March, however, so monitoring the region’s weather will still be key to predicting final yields.

Argentina carves itself a niche in the global soy trade

Argentina, the third largest soybean exporter, may have even more upside than Brazil. Throughout the last decade-and-a-half of rocky economic recovery, soy has been Argentina’s saving grace. As global soybean demand has soared, so have Argentine exports of both whole beans and products like soybean oil and ground soybean meal. In fact, Argentina is by far the world’s largest exporter of soybean oil, much of which ends up in the United States. The previous Kirchner administrations set a 35 percent export tariff on all soy. Even President Macri, for all his free market rhetoric, has been reluctant to remove the tax, lowering it only slightly to 30 percent. That’s unsurprising considering that this soybean export tax supports nearly a third of government spending. If President Macri is successful in lowering these tariffs, expect the share of soybean to oil exports to rise dramatically.

Of course soybean oil is of major economic importance, too, and is primarily used as both a biodiesel feedstock and a cooking oil (often referred to as “vegetable oil”). Much of the soybean oil that Argentina produces, which is not subject to the country’s draconian export tariff on soybeans, actually flows to the US due to its own draconian policies. The remarkably low costs and high volumes of Argentine soy oil have even aggravated EU producers who argue that the oil is “actually highly subsidized because of this complex [tariff] mechanism.” Argentina is no stranger to trade wars, having participated in several over the past few years, and 2018 already appears to be the next battleground.

Applications abound

Soybeans remain the most important and preferred source of high quality vegetable protein for animal feed manufacture, according to the FAO. Roughly two-thirds of total protein feed ingredient output worldwide are soybeans. It is easy to see the tight correlation by looking at the simultaneous growth of global animal stocks and global soybean production, especially in heavy pork consuming countries such as China.

Yet soybeans have various other uses, too, many of which are only now receiving attention from global processors. Soybean oil plays an important role in global agriculture, as mentioned previously, and edamame has long been consumed in Asian cuisines and now around the world. But a lesser known area that has seen dramatic gains over the past year is soy protein concentrate as an additive for beverages.

You couldn’t buy a clear protein beverage until recently. Whey and soybean concentrates and isolates are widely used to add protein to energy shakes and smoothies, but these additives prove problematic when making a transparent drink. Both soy and whey can leave an unpleasant aftertaste and unwanted texture to beverages.

New product formulations removing the unappealing aftertaste and texture were recently introduced at the Institute of Food Technologists' annual meeting. Unpredictable consumers can still make a promising technology turn sour, but beverage companies should be prepared for future sales opportunities if these new formulations pass the taste test. Sales of soy protein ingredients are projected to expand to $10.3 billion in 2022 from $7.11 billion in 2015. The whey protein market is forecasted to increase at a compound annual growth rate (CAGR) of 7.6 percent from 2017 to 2022 to reach a total market value of $9 billion.

Ultimately, these uses still pale in comparison to the demand for soybeans as livestock feed. Within the US, humans consume less than 2 percent of total soymeal production. One need to look no further than China to understand soybeans’ uses and their relative levels of magnitude.

Looking ahead

Soybeans consume more and more of our earth’s arable land each year, and 2018 appears to be no exception. It is true that China is slowing its consumption of pork, which has been the largest contributor to global soy growth in recent decades. So while the rate of new soybean plantings may ultimately be slowing, the absolute number of acres will continue to rise on booming demand from other developing nations.

These underlying market fundamentals will not change based on weather or a season of poor yields, so global trade wars (or outright wars) and geopolitics may ultimately be the biggest threat to soy’s dominance. Second only to China, Mexico imported 3.6 million tonnes of soybeans from the US in 2016, and any renegotiation of NAFTA may adversely affect these flows. China may soon be floating its currency, on the other hand, and the projected increase in Chinese purchasing power may introduce even more people who are able to afford the luxury of soy-fed meat.

At Gro Intelligence, we expect record soybean production in 2018. However, such a vital crop to global agriculture requires careful monitoring. We already see concerns regarding Argentine soybean production leading to higher prices. Brazil’s massive soybean harvest is well underway and it will be important to monitor weather and soil health as the season progresses. Further, any change in meat consumption or demand will also directly impact soybean prices. We recommend using Gro Intelligence to track these variables throughout the season.

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