CHICAGO (Reuters) - A year ago, no one in the agriculture industry would have predicted such a low carryout number to appear on the U.S. soybean balance sheet on Thursday when the U.S. government updated its supply and demand figures.
However, that lighter inventory – which is now expected to return near the previously “normal” range over the next year – is certainly vulnerable to build back up just as quickly as it disappeared.
When the U.S.-China trade war broke out a year ago, U.S. soybean supply estimates shot up to around the 1 billion-bushel mark, well above any previously observed level. As the trade war lingered and then Chinese soybean demand declined as African swine fever (ASF) decimated the country’s hog herd, it appeared the United States would have a very tough time chipping away at its overstuffed soybean inventory.
The 2018-19 ending stocks just missed 1 billion bushels, as the Sept. 1 supply came in at 913 million bushels. But that was more than double the stocks of the prior year and a whopping 59% larger than the previous record set in 2006-07.
On Thursday, the U.S. Department of Agriculture projected 2019-20 U.S. soybean ending stocks at 460 million bushels, notably below the average trade guess and down sharply from the September estimate of 640 million.
Back in June, carryout for the current marketing year was projected at 1.045 billion bushels. But that was just before the production problems with the domestic crop came to light.
USDA on Thursday pegged U.S. soybean production at 3.55 billion bushels with a yield of 46.9 bushels per acre, the lightest yield in six years. That is down 20% from the previous year and down 14% from what the agency had projected in June.
The smaller bean crop is largely driven by the planted area of 76.46 million acres, the fewest since 2011 and down 14% from last year. That was the result of dismal soybean prices, especially as they related to corn.
But farmers also had problems with corn due to a historically wet spring, and the planting pace had fallen to the slowest ever. Soybean planting was also near record slow.
Back in March, projected 2019 plantings of U.S. corn and soybeans combined at 177.4 million acres, some 11 million more than the eventual reality, which is a nine-year low.
Farmers will undoubtedly be looking to make up for that gap in 2020, and the splits will depend on corn and soybean prices and estimated profitability over the next few months. And if soybean area increases dramatically, stocks could go along for the ride.
The ratio of soybeans to corn in the Chicago futures market is often one indicator of which crop U.S. farmers may prefer to plant in the next cycle. It is still early to make judgments for 2020, but the ratio has been increasingly favorable to soybeans ever since bottoming out in May.
On Thursday, the futures ratio of November 2020 soybeans to December 2020 corn climbed to 2.39, its highest since early March. Historically, values above 2.5 tend to distinctly favor soybeans, but those around 2.3 or 2.4 can sometimes be a gray area.
On the corn side, December 2020 futures closed at $4.05 per bushel on Thursday, and the July contract ended at $4.02-1/4. Farmers often use a $4 benchmark for corn above which they consider the grain to be profitable.
The health of U.S. soybean exports, as well as price action in the soybean market, always depend heavily on China, and there is a lot up in the air right now. China’s exact need is the most important factor, but the ASF outbreak has made that difficult to determine.
USDA pegs 2019-20 Chinese soybean imports at 85 million tonnes, up from 83 million in the previous year but well below the pre-ASF levels, as imports topped 94 million tonnes in 2017-18. However, some analysts are less optimistic than USDA on Chinese soybean demand over the next year.
China’s recent involvement in the U.S. soybean market is much improved over a year ago, but it is still very underwhelming compared with past years. Through Oct. 3, U.S. soybean sales to the Asian country totaled 4.79 million tonnes, more than four times the purchased volume a year earlier.
USDA has confirmed another 596,000 tonnes of soybeans sold to China in the days since, but prior to the trade war and ASF, sales to the top bean consumer were often twice as large as they are today.
The United States and China resumed high-level trade talks on Thursday, though expectations for a resolution were not terribly high going in. U.S. President Donald Trump has specifically requested that China buy more U.S. farm products, but even if Beijing formally agrees, this does not truly raise demand levels.
Annual increases to Chinese soybean demand started tapering even before the ASF outbreak began in August 2018, however. This means that if the strong U.S. production levels reached between 2016 and 2018 had continued, the country may have been forced into an oversupply situation even without the Chinese demand disruption or the trade war.
The opinions expressed here are those of the author, a market analyst for Reuters.
Editing by Matthew Lewis