U.S. farmers are in the midst of a dynamic period in the soybean industry, a period of competition never seen before. That presents not only problems but also enormous opportunities, says John Baize, president of John Baize and Associates, an international agriculture policy and trade consulting firm.
The numbers are amazing when looking at the percentages of growth in demand for soybeans, corn, wheat and cotton since 1990. Globally, soybean demand has grown almost 80 percent over that period. Corn demand has grown by 30 percent. Wheat and cotton demand has grown less than 10 percent.
“The reason for this is that incomes are rising around the world. That means more consuming of beef, poultry, pork and fish. Consequently, more soybean meal is needed to produce those things. This is also the driving force behind soybean acres going into South America at such a rapid pace. Poultry and pork consumption are growing the fastest and by 2015, global poultry consumption will pass pork. That will be important to growers because chickens eat a whole lot of soybeans,” says Baize.
“Even with the extra acres that have been planted, we're still going to see a carryout this year that will be at rock bottom. In my opinion, I don't think carryout will be more than 100 million bushels.”
Soybean meal consumption is up 86 percent in the last 12 years. Consumption of meal shows an average of around 5 million tons of growth in demand annually. In that period, there wasn't one year that global demand didn't grow.
Soybean oil consumption is also interesting, says Baize. For the most part, soybean oil is a by-product of soybean meal production. When meal is produced, the oil is left over. Soybean oil normally finds its way into the market by pricing it's way there. Very seldom do you see soybeans being crushed for the oil content although there are some rare exceptions like in India and China.
Palm oil production has jumped 128 percent globally since 1990. Palm oil is the cheapest available with soybean oil coming in second. That's why palm oil will find a home first in poorer nations like China, India and Egypt, says Baize.
“But soybean oil's share of global consumption of vegetable oils has gone up. That's because low oil prices have driven out the production of rapeseed and sunflowers. Those crops have high oil content and are dependent on the price of oil. As prices are low, those oil seeds aren't being grown. Soybean oil consumption has grown as a result. In 1999, rape seed and sun seed production was at almost 70 million tons to around 56 million tons this year.”
The U.S. has always produced more than half the world's exported soybeans. That's no longer the case as the U.S. has been caught by Brazil, Argentina and Paraguay. This year, the U.S. crop was down — primarily because of a Midwest drought. Meanwhile, the aforementioned trio of countries will produce over 80 million tons.
“On soybean exports, the U.S. could always count on the American Soybean Association (ASA) and other organizations working around the world to develop markets. We knew that as the biggest exporter of soybeans, we'd get the dominant share of the business. We can't say that anymore because of South America exporting more whole soybeans than us. We must own up to the competition and change strategies.
“Our global share of soybean exports has been going down. This year, the percentage is below 45. It used to be 70 percent. South America has changed policies so there is no longer favoritism to meal and oil over whole beans.”
Baize points out that the U.S. has always been a relatively small exporter of soybean meal. That's because the U.S. soybean crushing industry has been set up to supply the domestic market.
Baize says there are only four or five U.S. crushing plants that sit in a coastal area. Conversely, Brazil and Argentina's crushing facilities were set up in coastal regions in order to supply the export market.
Biotech soybeans are booming. In the U.S. last year, some 75 percent of the soybeans grown were Roundup Ready. Argentina is growing 97 percent biotech soybeans. Brazil is at 45 percent and it's illegal to produce them there.
In fact, Baize says Brazil has a problem because China is insisting that any soybeans exported to them must be government-certified as safe. The Brazilian government is having trouble certifying soybeans as safe when they aren't even supposed to be consumed inside Brazil.
The EU — the largest import market for soybeans and meal in the world — has continued to grow consumption. The population in southern Europe is continuing to grow and accounts for some of the increase. However, the big reason for continued growth is that when meat and bone meal were removed from animal feeds to combat mad cow disease, the EU began buying soybean meal as a replacement.
China is the driving force behind the soybean market. Baize says that, at least in some measure, U.S. farmers need to be credited for bringing this about.
“Back in 1982, the ASA opened an office in China. At the time, a lot of people thought the ASA was nuts because China was a soybean exporter, a competitor. But over time China began to make changes in attempting to improve their people's diet. By 1996, they had developed major livestock and poultry sectors that used major soybean meal. Now, as China goes, so goes the soybean price.
“Our exports to China are up 100 percent this year compared to only a year ago. Crushing plants there are running day and night to produce the meal they need. They're consuming 16.9 million tons of meal this year.”
That is huge growth, says Baize — akin to adding four Mexico's to growth and demand for meal.
Baize believes the next explosion for demand will come from India.
About 5 years ago, an ASA office was opened in Delhi. Using the same approach taken in China, the ASA is helping demonstrate the benefits of using soybean meal to feed poultry, dairy cattle and fish. Domestic consumption is picking up and with the Indian economy growing at around 6 percent annually soybeans should “take off,” says Baize.
“Some people say, ‘well, there are a billion people in India but they're vegetarians.’ It's true that many Hindus are vegetarians. But about 70 percent of the population is vegetarian because they can't afford meat. Given an opportunity, they'll eat poultry and fish.”
The opportunity of the global market is seen when looking at per capita consumption of soybean meal, says Baize. In the U.S., residents consume about 100 kilos of meal per person per year. Each European consumes about 74 kilos annually.
“When you start looking at some of the very populous countries, the numbers are shocking. In Indonesia — which has 200 million people — the consumption is around 5.6 kilos per year. Indians each consume 1.1 kilos per year. Imagine increasing India's consumption rate by only a kilo per person. The possibilities for growth are amazing.”
Another positive for soybeans is a weakening dollar. The dollar is down about 18 percent over the last year versus the Euro.
“That's good because when we have a depreciating dollar, export values go up. Unfortunately, we also see a huge devaluation of the Argentine peso and Brazilian riyal. It's just bad luck that the biggest competitors the U.S. soybean farmer has are holding some of the weakest currency.”
Another issue is soybean meal being imported into Wilmington, N.C. Baize says to get ready for more.
The reason is simple: too many animals in the state and not enough soybeans. If you go from Virginia to Louisiana, every state touches the ocean and could easily bring in imports. What U.S. citizens would prefer is to take meal out of New Orleans or the Great Lakes and bring it to ports in those states.
But it can't be done unless you carry that meal on a U.S.-flagged ship. The ship must be owned by Americans, built in America, and manned by Americans. And that, says Baize, is simply unaffordable.
“It costs about $30 to take meal from New Orleans to Wilmington on a U.S.-flagged vessel. It costs about $8 on a foreign vessel. That means the railroads that service the Southeast have no competition. They charge high rates to move soybeans from the Midwest into the Southeast.
“The poultry and swine operators in North Carolina said, ‘To hell with all this,’ and started bringing in Brazilian meal at incredible savings. We must get a handle on this or the trend will continue.”
Through 2011/2012, USDA figures show South America will benefit from almost all the global demand, “because they'll grow the soybeans. The U.S. is about tapped out on acres unless more come back in the Southeast,” says Baize.
USDA also says Chinese soybean imports will be immense. In the next few years, forecasts show China will be responsible for over half the global soybean meal imports and half the soybean oil imports.
“When you add up the numbers, they're saying 80 percent of the soybean demand will be from China with some 65 percent of the global imports going to the country. I find that hard to believe.”
USDA is also forecasting 2011 numbers in regards to returns above variable cost (including marketing loan returns) for U.S. rice, corn, soybeans and cotton. Corn and soybeans will have higher returns above variable costs with cotton and rice bringing up the rear.
But with the farm bill, subsidies per acre means rice will get over $300 per acre and cotton will get close to $200 per acre. Corn will get less than $100 per acre with soybeans and wheat even lower.
“Now, if you believe you're going to keep those big payments on rice and cotton through 2010, go ahead. But we've already got a Brazilian case against us in the WTO (World Trade Organization) regarding cotton subsidies. Just wait until the Thais file one on our rice. Because of the WTO agreement, we'll probably have to agree to bring down the subsidies and open our markets to imports.
The industry that's most vulnerable is cotton. Cotton yields in Brazil are now higher than those in the U.S. And they've got a bunch of land that can still be put into production.”
So, says Baize, South America is good with soybeans — really good. But it has its problems too.
Asian soybean rust was first discovered in Paraguay in 2000. The rust has now spread by wind to other countries (including Argentina) and has been found in 40 percent of Brazil's crop. The rust can cause major yield losses — from 5 percent to 80 percent.
Asian soybean rust thrives in hot, muggy weather. Such conditions describe Brazil very well.
“The only way to prevent damage is to spray 3 applications of a fungicide. The first application must be made when a producer figures he might get it — not when he first sees it. If a producer waits to see it, it's too late. And then you keep spraying to the tune of an ending cost of around $35 per acre.
“Some speculate that if the rust grows to its potential, the Brazilian soybean industry will be hurt badly. Rust is normally knocked back by winterkill. In Brazil, there is no winterkill. We're just waiting to see how bad it will be down there.”