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Future of Soybeans Rests in Brazil’s Hands

Posted on: September 18, 2008 - Email Article - Printable Version

Darrell Reid

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It’s the most important crop in the world. Its price per bushel has skyrocketed over the past five years due to the evolving appetites of emerging nations, and limited acreage has only exacerbated the situation. Many investors have declared its recent action the formation of a bubble unfounded by fundamentals and merely the result of market speculation and low inventories depleted by government-sponsored energy mandates. I am not talking about corn- soybeans are the protagonist of this tumultuous agricultural commodities drama.

Soybeans are primarily crushed into soybean meal or processed further for soybean oil. Soybeans account for over 90% of oilseed production in the U.S., 65% of world supplies used in livestock feed, and two-thirds of all vegetable oils and animals fats. The impact this crop has on the world is undeniable, and as commodities prices fluctuate a new leader is emerging at the forefront of this bull market.

Overview

As mentioned before, soybeans are crushed into meal or processed into oil. In the U.S. they are planted between May and June and harvested in late September and early October. Nearly 80% of soybean acreage is concentrated in the upper Midwest and grown in crop rotation with corn. One unique feature of soybeans is their ability to retrieve nitrogen from the air, resulting in less than 40% of the crop using commercial fertilizer, a stark contrast to most other crops. Soybean meal is the most valuable component of protein feed of which 98% is purchased by livestock farmers. Soybeans have long competed with corn for acreage and are currently suffering due to market dynamics in the U.S.

In the U.S., plantings peaked in 2004 at 75.1M acres, due to higher yields and lower production costs, an obvious incentive for farmers. As the largest producer and exporter, the market for soybeans has grown to $18B. As massive as this may seem, the U.S.’s years as number one producer are numbered as their share of global exports have diminished from 70% in the 1970’s to less than 50% now. The phenomenal growth of Brazil and Argentina is the reason for this shift, as their combined share of global exports has risen to 50% from a mere 15% in 1980.

The Brazilian farming industry has benefited from drastic increases in infrastructure spending and favorable growing conditions. Earlier this year, Merrill Lynch raised their estimates from $100B to $225B for Brazilian infrastructure spending over the next three years, which significantly decreases farmer’s transportation costs. Argentina benefits from a low export tax on processed commodities and growing regions in close proximity to their ports. It is possible that Brazil could surpass the U.S. as the world’s largest exporter this year as harvests begin later this month. However, whether it’s this year or next the end result is still the same- Brazil is the future of soybeans.

Outlook

Soybean acreage has most likely peaked in the U.S., decreasing 15% from 2006 to 2007. This is most certainly due to farmers’ ability to fetch a higher price for corn, making corn harvesting more profitable. Soybean yields have been steadily increasing by approximately .45 bushel per year, which barely offsets the decrease in available land. One point on crop yields- farmers enjoyed stronger yields, planting thinner 8-inch rows in the 1990’s. Due to the increased risk of crop disease, it is more likely that farmers will return to 15-inch row plantings. Not only is there less available land to plant soybeans, but biodiesel is chipping away at inventories as well. Biodiesel is leading consumption gains of soybean oil, currently accounting for approximately 20% of the soybean oil market. Modest growth in meat production is also keeping more soybeans domestic. The USDA projected the U.S to only have 21% market share of global soybean exports in 10 years, less than half their market share in 2006, due to more soybeans kept for domestic use and limited acreage for plantings.

On the other hand, South America has set export records for the past ten years. The Brazilian Real is strengthening against the dollar, lowering production costs, and Brazil boasts vast farmland reserves that could be tapped for further harvests. The fundamentals are certainly there, and companies such as Bunge[BG: 54.74, +1.57 (+2.95%)], Archer-Daniels Midland[ADM: 29.08, -0.11 (-0.38%)], FMC[FMC: 45.96, +0.54 (+1.19%)], and Potash Corp. [POT: 82.62, +5.27 (+6.81%)] are good plays on this agricultural market.