Soybeans rally as demand is rationed

The extent of demand rationing and how far prices might rise will depend on how long it remains dry in Argentina

The soybean-led oilseed price rally is not over, according to a senior executive at one of the world’s largest grain companies.

Markets are beginning to ration demand, which is something that hasn’t happened for seven or eight years, said Joe Stone, Cargill’s executive vice-president of the agricultural supply chain and head of corporate trading.

“We’re still very early in this process,” he said during a Soy-Suite webinar hosted by the United States Soybean Export Council.

“It takes a while for us to begin to see those signs and I would say we’re just at the very beginning of that process but we are going to need to ration.”

That means rising prices. The extent of demand rationing will depend on Argentina’s weather.

If it rains in Argentina in the coming weeks then soybean prices may already be close to their peak.

But if it stays dry through late January or early February as is forecast due to La Nina, then prices could take “a big step” higher.

Stone’s best guess is that prices have not topped out, but he is forecasting a “choppy ride” on the way up.

The reason for his optimism is that oilseed markets are experiencing the rare combination of a demand-side pull and a supply-side crunch.

“We see a lot of pent-up demand,” he said.

Much of that is coming from China where the hog industry’s recovery from African swine fever has exceeded expectations.

On the supply side, dry weather is having a big impact on Argentina’s crops and has taken the topside off of Brazil’s soybean prospects.

The combination of strong demand and slumping supply is providing “jet fuel” to prices. The industry has quickly transitioned from a surplus situation in June and July to today’s demand rationing scenario.

Cargill is heavily invested in China. It has a significant crush, food and animal feed business in the country.

In September, Cargill expanded its holdings in China by buying a world class crush facility in an auction on Alibaba. It acquired the Shandong Xinliang Oils and Fats Co. for US$62 million.

Stone said Cargill’s soymeal customers in China are in expansion mode, which bodes well for the commodity.

On top of that source of demand, there is no doubt that the Chinese government has decreased its corn and soybean reserves in the past four or five years and is in the process of rebuilding stockpiles.

That should be a positive market factor for the next year or two.

Another exciting development for the soybean industry is California’s Low Carbon Fuel Standard, which is expected to spread to other states.

That has generated significant interest in renewable diesel facilities. That new source of demand will eventually put pressure on traditional renewable diesel and biodiesel feedstocks like used cooking oil.

“Vegetable oil is absolutely going to be needed to help fill in the feedstock supply gaps, which eventually could be pretty significant,” said Stone.

There is also plenty of buzz surrounding sustainability these days.

“It’s the defining issue of our time,” he said.

But the reality is that most of Cargill’s customers are unwilling to pay a premium for sustainably sourced products.

China is a good case in point. The country is responsible for 60 percent of world soybean trade.

“Today there is not a value being placed on sustainability there. It’s more about food security,” he said.

The European Union is the other extreme. It has very specific sustainability requirements.

Stone believes customers will eventually be willing to pay sustainability premiums and when that happens farmers in North America will be well positioned to monetize their farmland stewardship.

Cargill is in the very early stages of developing a carbon credit program that will reward farmers for their practices.

“We do believe there’s a strong market for the carbon credits that come from regenerative agriculture,” he said.

Farmers have told the grain company they would be happy to participate in the program but only if it is easy and doesn’t involve a lot of paperwork.

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