With equity markets hitting all-time highs, and US GDP running over 3%, it's hard to find any part of the economy that is not doing quite well. In fact, one of the only struggling parts of the economy is US agriculture. With farm incomes hitting decade lows and input costs rising, farm margins continue to shrink. With the rollout of tariffs on China in the spring of 2018, soybeans have been center stage in applying pressure to US farm incomes. As you can see below, soybeans have lost nearly 20% of their value since 2018, and worse still, South America has seen their basis improve by over $2.00/bushel for their soybeans due to Chinese demand.
Source: Illinois University
With significant sales lost over the last year for US soybeans, and with current stockpiles set to reach record levels, the question is can soybean prices stabilize in 2019, or is more bearish price action on the way. Examining the current supply outlook, tariff situation, and AFS situation in China lead to the conclusion that soybean prices are heading lower still in 2019!
Over the last decade, the world, and particularly China's insatiable demand for soybeans has been met by US farmers. More acres and overall production are how farmers responded to higher prices offered for soybeans. Even with record acres and production, soybean stockpiles have remained small in the US because of Chinese and world demand. However, following the implementation of tariffs in 2018 and another record harvest, the current stocks to use ratio as seen below paint a bleak picture for 2019.
You can see above that US soybean stockpiles have nearly doubled in the last 10 years. However, the important item to consider is how usage/demand has responded. You can see that up until last year usage continued to increase, absorbing new supply coming online. The concerning part of the data above is that usage for 2018/2019 crop is projected to be at levels not seen since 2012.
The other major concern regarding soybean supply moving forward is the projected acres for 2019's crop year. As seen below, farmers are planning to reduce acreage from last year's record level.
While acreage is down from record levels, the current concern is two-fold. First, current planting conditions are so poor for corn that corn acres are going to be switched to soybeans this spring due to planting delays. Second, even with a decrease in acreage, ending stocks for 2019-2020 crop year are projected to be close to a billion bushels because of decreased demand, which results in the largest carryout in over 20 years.
Soybeans have been front and center of the US/China trade negotiations. With a deal possible as early as this coming week, there may be some relief for soybean prices in the near future. The biggest concern is what permanent impact tariffs will have on Chinese purchasing strategies and behaviors for soybeans. Below you can see just how much sales of US soybeans has been lost to the Chinese.
As you can see, major sales were lost in January and February of this year, with the Chinese only purchasing a third of the normal soybeans for that timeframe compared to the 5 year average. On a somewhat optimistic note, purchases into this spring have held with the 5 year trend, and if a trade deal is struck this week, more buying should occur. The big concern is the majority of sales for the crop year that has been lost since January-March are when the largest sales to China occur during the crop year.
Looking ahead, the major concern for US soy producers should be the spread of ASF (African Swine Flu) throughout the Chinese pig population. While initially claiming it was contained, the virus has spread like wildfire across China, wiping out more pigs than the entire US pig population (over 75 million hogs). As seen below, it's quite obvious the virus continues to get worse, not better, let alone contained.
Source: Illinois University
With monthly declines reaching 5-7% for Chinese hog herds, this will result in direct demand destruction for US soybeans, even if a trade deal is reached. More concerning is how long the virus continues to spread and impact not just China, but all of Asia.
In recent weeks, front month soybean prices have returned to their fall lows near $8.50/bushel. With current weather models continuing to suggest more rain in the Midwest for the next few weeks, it's likely that soybean acres will increase in 2019. With stockpiles set to grow, and ASF likely to destroy soy demand at least for the next few years, a trade deal will likely only result in a short term spike in price. Fundamentally, prices for soybeans will most likely remain at current levels or fall further in 2019 barring any significant weather events in the July-August timeframe. Unlike corn, which does have some fundamentals in its favor, the bearish sentiment for soybeans is justified moving forward. Prices will continue to move downward until farmers reduce acreage or additional feed demand emerges. Until then, expect the bearish price action in soybeans to continue through 2019.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.