The soy complex may be rallying on the Chicago Board of Trade, but the outlook for U.S. supply retains its bearish feel, despite significant losses to Argentina’s soybean crop amid parched conditions.
Last month, the U.S. Department of Agriculture cut domestic soybean exports to 2.1 billion bushels, some three per cent smaller than last year’s record. But this number might need to come down further as recent shipments have been unremarkable.
In the meantime, U.S. soybean crush is going strong with hefty margins, but it is unlikely to outweigh a possible downward revision in exports.
A significant drought in Argentina, the No. 1 supplier of soybean products, has catapulted CBOT futures. This past week, CBOT soybean futures for May delivery hit lifetime highs and May soybean meal did the same.
The Argentine drought has sent commodity funds on a major buying spree in the futures and options arena in recent weeks, especially when it comes to soybeans and meal.
But there is still an elephant or two in the room.
For one, industry estimates of the soybean crop in lead exporter Brazil have started edging past last year’s record of 114.1 million tonnes.
And back in the United States, supplies are plentiful. USDA predicts that 530 million bushels of soybeans will be left over when the current marketing year ends in August. If realized, it would be an 11-year high and 75 per cent larger than the previous year.
But despite Argentina’s troubles, recent demand for U.S. soybeans has not yet shown any signs of significant strengthening, which places year-end supply in danger of rising further.
According to the National Oilseed Processors Association (NOPA), its members have crushed a new record volume of soybeans during the first five months of 2017-18, some two per cent more than a year ago.
Crushing soybeans certainly appears profitable. Early last week, nearby CBOT crush margins reached into the upper US$1.60-a-bushel range, substantially higher than usual for the time of year. This was driven by a surge in soybean meal and suggests that processors should be crushing pretty close to capacity.
USDA predicts that domestic crush will rise to a new record 1.95 billion bushels during this marketing year. But this estimate is likely already near maximum, and any further upside may have a lot of trouble offsetting potential cuts in exports.
In order to achieve an annual crush of two billion bushels – assuming it is physically possible – monthly volumes would have to break records by an average of three per cent from February through August.
But the recent totals have not been impressive to that degree. So far this marketing year, the largest margin over a month’s previous highest crush volume came in November at 1.5 per cent.
Even if similarly modest records could be set in the final seven months of 2017-18, annual crush probably cannot push much past 1.96 billion to 1.98 billion bushels.
That means that all of the efforts from U.S. soybean processors to increase domestic soybean use can be wiped away with a not-so-inconceivable 30-million-bushel reduction to exports, at least judging by USDA’s current balance sheet.
In the week ended Feb. 22, just 761,961 tonnes of soybeans were inspected for export at U.S. ports, which is the smallest full-week volume yet this marketing year. Through the same date, annual soy inspections lagged year-ago pace by 13 per cent.
In the week ended Feb. 15, U.S. soy export sales showed net cancellations for the first time in 2017-18. While February cancellations are not necessarily uncommon, they might not pave a path to 2.1 billion bushels, especially with a big Brazilian crop about to flood the market.
This is the time of year that the United States hands Brazil the title of leading soybean source, but buyers have already been choosing the South American beans. Trade data released over the weekend showed that China’s import price for the Brazilian product in January was cheaper than the U.S. one for the first time since September.
There is evidence, however, that demand for U.S. soybean meal has increased in the wake of Argentina’s woes. In the current marketing year through Feb. 15, the United States has sold seven per cent more meal than in each of the previous two marketing years.
But this ultimately translates to increased crush demand, something that is either unnecessary, impossible, or potentially both.
Karen Braun is a Reuters market analyst. The views expressed here are her own.