Tano Capital Research: Soybeans Supply and Demand

BACKGROUND

The major U.S. oilseed crops are soybeans, cottonseed, sunflowerseed, canola, rapeseed, and peanuts. Soybeans are the dominant oilseed in the United States, accounting for about 90% of U.S. oilseed production. Most U.S. soybeans are planted in May and early June and harvested in late September and October.

Large-scale production of soybeans did not begin until the 20th century in the United States, but area planted to soybeans has expanded rapidly. Soybeans are the second most planted field crop in the United States after corn, with 77.5 million acres planted in 2009. Increased planting flexibility, steadily rising yield improvements from narrow-rowed seeding practices, a greater number of 50-50 corn-soybean rotations, and low production costs (partly due to widespread adoption of herbicide-tolerant varieties) favored expansion of soybean acreages.

Rising yields have also encouraged expansion of soybean acreage, as seed varieties, fertilizer and pesticide applications, and management practices have improved over time. Higher yields reduce per-bushel production costs, which increases profitability.

In the United States, soybeans are most commonly grown in a crop rotation with corn. Since the early 1980s, double cropping of soybeans with wheat in the South has declined. The development of better herbicide applications has allowed producers to use less intensive soil cultivation practices. Soybean pesticide use (nearly all of which are herbicides) ranks second only to corn. Commercial fertilizer was applied to less than 40% of soybean acreage, a much lower rate than for most row crops (e.g., corn and cotton). Unlike other crops, soybeans can fix their own nitrogen and require minimal nitrogen fertilizer.

Soybeans were one of the first bioengineered crops to achieve commercial success. The popularity of bioengineered soybeans among U.S. farmers has ramifications for resource use, marketing, and international trade. Herbicide-tolerant soybeans have lowered the cost and changed the type of herbicides used by farmers. Initially, the bioengineering of oilseed crop traits has focused on improving production attributes, such as higher yields and lower costs. But enhanced functionality characteristics will soon emerge, such as high oleic, high stearate, and increased omega-3 content.

In the United States, nearly all soybeans are crushed to extract the oil from the resulting meal. A comparatively small amount of whole soybeans are used for seed, roasted for snacks or on-farm dairy feed, and consumed as traditional soyfoods such as tofu. Almost all soybean crushers are located near the major production regions, with good access to rail and barge carriers that transport products to Gulf of Mexico ports.

Soybean meal is the most valuable component obtained from processing soybeans, ranging from 50-75% of its value. By far, soybean meal is the world's most important protein feed, accounting for more than two-thirds of world supplies. Livestock feeds account for 98% of soybean meal consumption, with the remainder used in human foods such as bakery ingredients and meat substitutes.

Soybean oil generally has a smaller contribution to soybean value, as it constitutes just 18-19% of soybean weight. Yet soybean oil accounts for 55-65% of all vegetable oils and animal fats consumed in the United States. It is mainly used in salad and cooking oil, bakery shortening, and margarine, as well as in a number of industrial applications. Until 2005, soybean oil was the largest source of vegetable oil worldwide. In 2005, however, palm oil overtook soybean oil in volume of production. Palm oil and rapeseed oil (canola) production are expected to continue to grow over the next few years.

Unlike wheat, barley, and corn, there is a balance between soybeans production and export areas in the Northern and Southern hemisphere. Because of the changing weather patterns, increased demand, and tougher competition due to the use of technological means and genetic improvements, the reliance on successful harvest is more important than ever before. A 2009 water shortage and excessive heat in Argentina caused a crop price increase as well as great profit for North America.

(CyclOpe: World Commodity Yearbook, 2011)

WORLD FOOD CONSUMPTION TRENDS

Low-income countries allocate a greater portion of additional income to food. As countries become more affluent, more is allocated to luxury categories like recreation. For instance, a dollar increase in income would cause food expenditures in the Democratic Republic of Congo to increase by 63 cents, but only by 6 cents in the United States. In contrast, recre­ation expenditures in the Democratic Republic of Congo would not increase at all, while in the United States recreation expenditures would increase by 13 cents with an additional dollar of income.

The income elasticity of demand for food varies greatly among countries and is highest among low-income countries, where it varies from 0.85 for the Democratic Republic of Congo to 0.71 for Tunisia. It ranges between 0.71 to 0.57 for middle-income countries, and from 0.56 to 0.35 for high-income countries. The average income elasticity for low-income countries is 0.78, over 1.5 times the average for high-income countries.

With affluence, the portion of additional food expenditures allocated to cereals and other staples decreases.

(“International Evidence on Food Consumption Patterns An Update Using 2005 International Comparison Program Data”, Economic Research Service, March 2011)

The world stocks-to-consumption ratio of soybeans reached a historically high level at the end of the 2009-2010 season: 27.9% according to Oil World.

Consumption oils growth in China reached 60% since 2003. The estimated vegetable oils consumption per person in China in 2010 was around 19 kilos per year, comparable to the average global level, which is around 20 kilos, and in excess of the Japanese level of approximately 17 kilos. According to the Chinese agency BOABC, the Chinese consumption of vegetable oils should increase 5%-6% per year, which will maintain China’s statute of the world’s leading consumer, and consequently the import dependency will increase. Based on the International Olive Council’s predictions, the consumption of olive oil in China will exceed 100,000 tons in 2015. Therefore, the Chinese authorities’ strategy has been a diversification of supplies, which positively responds to the big Chinese food-processing companies and multinationals proposal of using mixed or blended oils in order to help other oils to sell well. Along the same strategic moves, China is trying to diversify its imports of vegetable oils and oilseeds products.

Chinese soybeans suffer from the lack of competitiveness in the face of the GMO soybeans from Americas caused mainly by the higher grinding rates. Consequently, the Chinese soybeans cultivated areas were reduced and the imports increased causing the soybeans to become a “political and diplomatic weapon for China”. In 2010, the Chinese Ministry of Trade imposed an embargo on imports from Argentina’s soybean oil after the implementation of Argentinian measures against the Chinese-manufactured products. Also, early 2011, Chinese President, Hu Jintao visited the US and assisted the Obama Administration by signing an American GMO soybean import contract.

(CyclOpe: World Commodity Yearbook, 2011)

TRADE

World oilseed trade consists of many closely substitutable commodities, such as soybeans, rapeseed, sunflowerseed, and cottonseed. Countries also trade oils and meals obtained from crushing oilseeds. Foreign import demand depends on the difference between countries' domestic oilseed output and consumption. Divergent demand for protein meal and vegetable oil as well as limits on domestic processing capacity, determine the ratio of oilseeds to oilseed products that countries import. The volume and source of foreign imports depends on seasonal availability and relative prices, credit and delivery terms, local preferences, and quality. Country policies, such as tariffs and domestic subsidies, also can affect prices and the availability of competing products.

Historical Background for Trade Projections

Since the beginning of 2002, fluctuations in production, trade, and stocks of agricultural commodities have been unusually large, and have been contributing factors to wide price fluctuations. Between January 2002 and June 2008, an index of monthly-average world prices of wheat, rice, corn, and soybeans rose 226% and then declined 40% in the following 6 months. By June 2010, the index had fallen another 11%. The price index then rose 55% by December 2010 and stood at about 172% above the January 2002 level, although still 17% below the June 2008 peak. The 55% increase between June and December 2010 raised concerns about another major food-commodity price spike as in 2007-08.

(USDA Long-term Projections, February 2011)

>  US EXPORTS & IMPORTS 

The United States is the world's largest producer and exporter of soybeans. Oilseed and oilseed product exports, particularly soybeans, represent a significant source of demand for U.S. producers and make a large net contribution to the U.S. agricultural trade balance.

Main export destinations for U.S. oilseeds, oilseed meal, and vegetable oil include China, the European Union (EU), Japan, Mexico, and Taiwan. Other important markets include Indonesia, South Korea, and Thailand. Canada, Mexico, the Philippines, and several Latin American countries also import significant quantities of U.S. oilseed meals. U.S. vegetable oil exports are more dispersed and are heavily influenced by concessional food aid to developing nations.

U.S. imports of oilseeds and oilseed products were worth $3-4 billion in the late 2000s, and are mainly rapeseed and rapeseed products (e.g., canola oil) from Canada, olive oil from Western Europe, and tropical oils from the Philippines, Indonesia, and Malaysia.

Despite substantial growth in oilseed and oilseed product output in the past 25 years and recent gains in export volume, the U.S. share of global exports has steadily diminished. In the mid-to late 1970s, the United States dominated world trade in unprocessed oilseeds, with a global market share of more than 70%. Recently, this figure has fallen below 50%. From a smaller percentage base, the United States has seen its share of oilseed meal and vegetable oil exports decline even more sharply, particularly before 1990.

A key development has been the phenomenal growth of foreign soybean output and exports, particularly by Brazil and Argentina. Foreign soybean output now exceeds that of the United States, and Brazil and Argentina currently share more than half of the soybean export market, up from less than 15% before 1980.

Another factor is the recent expansion of U.S. meat exports, which stimulates domestic meal use rather than exports of soybeans or soybean meal.  (USDA Long-term Projections, February 2011)

>  MAJOR FOREIGN SOYBEAN EXPORTERS AND IMPORTERS

Recent increases in production by Argentinian and Brazilian grain and oilseed producers could foreshadow continued gains on the strength of abundant undeveloped agricultural resources, more stable economies, and expanding trade liberalization. Brazilian and Argentinian soybean and meal exports are projected to continue capturing market share from the United States in the next decade. Most of the soybeans exported by Argentina go to China.

China is the world's fourth-largest producer of soybeans. Rapid growth of China's economy has spurred food consumption, turning the country into the world's leading soybean importer. Changes in China's agricultural and trade policies have greatly influenced world oilseed markets. China's WTO accession has reduced import tariffs and quantitative restrictions to its oilseed market.

In the late 1980s, China, as the net soybean export country, could export 1.71 million tons in the highest year. From 1996, the domestic soybean yields were beginning to cut down. From 1995 to 2002, the annual imported soybean volumes showed the increasing trends, conversely, the reducing trend for the export volumes. In 2002, China imported 13.94-million-ton soybeans, near to the domestic soybean yield volumes. In 2003, the import soybean volumes in China reached 20.74 million tons, the import volumes exceeding the domestic yields for the first time. The statistics showed that the soybean import volumes were increased year by year, which were 20.23 million tons in 2004, 26.59 million tons in 2005 and 28.26 million tons in 2006. In 2008, the soybean import volumes were 37.44 million tons, up by 259.3% compared with 10.42 million tons in 2000 with the annual growth rate of 173%. However, the domestic soybean yields were only about 15.5 million tons in 2008 in China. (Research Report of Chinese Soybean Industry, 2009)

Although China is the largest soybean import country in the world, the annual soybean import volumes exceeding 30 million tons, the Chinese enterprises cannot not take part in the international price-making - according to the Research Report of Chinese Soybean Industry, 2009 - only engage in the futures exchange in COBT and passively accept the price made by COBT. American enterprise occupied over 90% of trade shares in the international soybean export market and mastered the soybean price-making in the world.

For the soybean process step, the soybean self-sufficiency degree and the domestic soybean price are the major evaluation indicators. In China, the soybean self-sufficiency degree is less than 40%, which continues to drop. The soybean price fluctuates greatly, especially with the influences of the imported soybeans. (Research Report of Chinese Soybean Industry, 2009)

Despite the expected decline in U.S. soybean exports this coming year, China is expected to continue to be the No. 1 U.S. soybean market. Over the past year, China imported a record 1.9 billion bushels, with just under a billion bushels or 50% coming from the United States. With their economy still growing at a near double digit rate and the population demanding more meat and vegetable oil, their imports are expected to increase to a new record for the 2011 marketing year. They are expected to increase their imports to nearly 2.1 billion bushels, but only about 900 mmbu are expected to come from the United States due to availability and competition from South America. (Soybean Price Volatility to Remain, October 12, 2011, unitedsoybean.org)

Chinese soy usage is by far the world’s largest and is 50% larger than that of the United States, which exports much of its soy products. Also, China is the single largest user of soybean meal in the world at about 46.6 million metric tons for their feed market. For comparison, the entire European Union consumes only about 33.1 million tons and the United States consumes about 27.7 million tons. This gives China just over 25% of the total world’s consumption of soybean meal. (Soybean Price Volatility to Remain, October 12, 2011, unitedsoybean.org)

China consumes about 12.4 million tons of soybean oil compared to the U.S. domestic use of about 8.1 million tons. The next largest user is well below those totals. This puts China at about 29% of total world usage of soybean oil. (Soybean Price Volatility to Remain, October 12, 2011, unitedsoybean.org)

Indian production of soybeans and other traditionally grown oilseeds — such as peanuts, rapeseed, and cottonseed — has increased in the last decade, although yields are among the world's poorest. India often imposes prohibitive barriers on oilseed imports, so its domestic crushing industry relies on domestic oilseed supplies. Domestically produced oilseeds are highly valued sources of vegetable oil, but domestic consumption has risen faster than domestic production so that India is now among the world's largest vegetable oil importers. India is a smaller (but growing) consumer of soybean meal, and exports its surplus to other Asian countries.

The European Union is self-sufficient in vegetable oil production, but its protein deficit still makes it the world's largest importer of soybean meal and second-largest importer of soybeans.

U.S. soybean exports to Mexico have more than doubled since 1993. Strong income growth among Mexican consumers has boosted consumption of meat and vegetable oils and increased demand for soybeans. Improvements in Mexico's rail links at the border have also expedited trade in oilseeds. Imports by Mexico are primarily seed, which are crushed domestically.

>  MACROECONOMIC RISKS

• Labor Market Risks in Developed Economies
• Financial Market Risks
• U.S. Business Confidence Risks
• U.S. Dollar Risks
• China’s Inflation Risks

World population growth continues to slow over the next decade, rising about 1% per year for the projection period (2011-2020) compared to an annual rate of 1.7% in the 1980s. China and India together account for 37% of the world’s population. China’s population growth rate slows from 1.5% per year in 1981-90 to 0.4% in 2011-‘20. The population growth rate in India, the world’s second most populous nation, is projected to decline from 2% to 1.2% per year over the same period.

The U.S. dollar is projected to depreciate moderately through the projection period (2011-2020) and thus continue to facilitate growth in U.S. agricultural exports. Among agricultural products, U.S. exports of bulk commodities and horticultural products tend to be the most sensitive to movements in the U.S. dollar’s value, because they face more global trade competition.

(USDA Long-term Projections, February 2011)

>  PROJECTIONS TO 2020 (USDA)

USDA’s long term projections: slow transition back toward a long run sustainable growth in 2011 and beyond.

World growth from 2011-2020 projected to increase at an annual average rate of 3.5% reflecting continued high growth in emerging market countries (e.g. China, India) and an expected stronger growth in other developing countries.

Developed economies are projected to grow at an average annual rate of 2.2% in 2011-20, more than half a percentage point lower than the 1970-2008 historical average. Developed countries’ share of global real GDP: >60% in 2020; 70% in 2007; 80% in 1970.

USA projected growth: 2.8% in 2012; 2.6% 2013 on; whereas EU is projected to grow only at a 2% rate through 2020.

Agricultural product prices are projected to remain historically high through 2020 above pre-2006 levels as a result of: (a) increasing world demand for grains, oilseeds, and livestock products; (b) a devaluation of the U.S. dollar; (c) continuing high energy prices; and (d) some further growth in biofuels production.

World agricultural production rises in response to high prices and technology enhancements. Factors expected to slow production growth in the future: (1) Many countries have a limited ability to expand planted area. And, in many regions, the expansion that does occur takes place on land with lower productive capacity. (2) The growth rate in world average crop yields has been slowing for nearly two decades, to some extent as a result of reduced research and development funding. (3) Water constraints in some countries are impeding the expansion in irrigation. Where irrigation water is pumped from deep wells, the energy cost of pumping is projected to continue to increase. (4) Other costs of production such as fertilizers and chemicals are also likely to increase.

Food consumption and feed use are particularly responsive to income growth in developing countries, with movement away from staple and/or traditional foods and toward more diversified diets. Agricultural demand in developing countries is further reinforced by population growth rates that are nearly twice those of developed countries (particularly Africa and Middle East are projected to have some of the strongest growth in food demand and agricultural trade over the coming decade).

Global trade in soybeans and soybean products has risen rapidly since the early 1990s, and has surpassed not only wheat—the traditional leader in agricultural commodity trade—but also total coarse grains (corn, barley, sorghum, rye, oats, millet, and mixed grains). Continued strong growth in global demand for vegetable oil and protein meal, particularly in China and other Asian countries, is expected to maintain soybean and soybean-product trade well above wheat and coarse grains trade throughout the next decade.

Many countries with limited opportunity to expand oilseed production, such as China and some countries in North Africa, the Middle East, and South Asia, have invested heavily in crushing capacity in recent years. As a result, import demand for oilseeds has grown rapidly and should continue to grow.

Global trade in soybeans is projected to increase 30%, soymeal by 21%, and soyoil by 19% by 2020.

In China, increasing per capita income is projected to continue a rapid expansion of consumer demand for livestock products and vegetable oils. Feed rations are expected to include an increasing percentage of protein meal to improve rates of weight gain for meat-producing animals. China will mostly import oilseeds for crushing rather than large amounts of oilseed meals and oils. This changes the composition of world trade by raising global import demand for soybeans and other oilseeds rather than for oilseed products.

Argentina, Brazil, and the United States continue to account for about 89% of the world’s aggregate exports of soybeans, soybean meal, and soybean oil during the coming decade. In Argentina, uncertainties about grain policies cause farmers to shift some land to soybean production. Also, some pasture land is converted to crops, especially to soybean production. This enables Argentina to increase its soybean production, and its share of world exports of soybeans and products remains above 30%. Brazil’s soybean area continues to increase, but an increasing share of soybean production is crushed for domestic feed and food use and its share of exports remains in the 25-31% range. The U.S. share of world soybean and soybean meal trade declines from 29% to less than 26% by 2020.

The EU is expected to expand biodiesel production using rapeseed oil as the primary feedstock. Rapeseed area increases early in the projections. Although EU imports of soybeans are projected to decline, imports of soybean meal and soybean oil increase. The EU was the world’s leading importer of soybeans until 2002 but it the imports declined ever since and this trend is expected to continue.

China’s soybean imports raised sharply and now account for more than 50% of world trade. It accounts for more than 90% of the projected 30-million-ton growth in global soybean imports over the next 10 years.

World trade in soybean meal climbs by more than 12 million tons (about 21%) in the projections to 2020. Argentina, Brazil, and the United States remain the three major exporters in international soybean meal markets. Together, their share of world exports rises slightly to 90% during the next 10 years. Argentina is the world’s largest soybean meal exporter.

World soybean oil imports climb 1.8 million tons (19%) in the projection years, bolstered by rising food use and increased demand for use in biofuel production. China and India are the world’s two largest soybean oil importers, primarily for food use. Argentina’s and Brazil’s combined share of world soybean oil exports dropped from 84% in 2005/2006 to 65% in 2009/2010 due to poor harvests. However, these countries are projected to recover partially during the next 5 years to about 75% of world trade.

(USDA Long-term Projections, February 2011)

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Sources: USDA; CyclOpe; Economic Research Service; Oil World; Olive Council; BOABC – Chinese agency; The Hightower Report; ERS; Research Report of Chinese Soybean Industry; unitedsoybean.org; FAS, Office of global analysis.