Crush demand boosts soybean basis

PEORIA, Ill. — Soybean cash prices are typically in the dumps at harvest time, but a strong crush demand and basis didn’t let that happen.

“The basis in soybeans this time of year is the strongest it’s been in over 20 years,” said Todd Hultman, DTN grain market analyst, at the Greater Peoria Farm Show.

The national average basis for soybeans on Dec. 21 was 22 cents under the January futures contract, while the DTN National Soybean Index was at $14.59 per bushel.

“That basis, to me, means a lot because it comes from the actual bids of commercials trying to buy your soybeans. This is usually when we have the seasonal low in the year, but to have this strong of a basis situation is a very bullish consideration for your market plans,” Hultman said.

“The strong basis is largely coming from crush. Based on January futures prices, the crush value — that is if we crush a bushel of soybeans, how much is the meal and oil worth for crushing the soybean — that comes out in January futures prices to $18.24. The cost of the soybean is $14.71 per bushel. The crush premium comes out to $3.52 a bushel.

“If we would have been looking at crush any other year before this year, we’d see crush premiums of about $1.50 a bushel and if things were really good maybe $2 a bushel. We’ve blown out a new chart with a new crush value of $3.52. It’s the best returns processors have ever seen.

“Crush is a phenomenal source of demand. They’re not going to stop buying soybeans anytime soon.”

Soy Oil Growth

There has always been strong crush demand on the soybean meal side, bolstered by China’s demand for more pork and poultry. Demand for soybean oil, the other crush byproduct, has also strengthened.

“For a long time, we didn’t know what to do with the soybean oil. It was kind of left over to languish with surpluses and we tried making traditional biodiesel when we could get a tax credit every now and then,” Hultman noted.

“But now soybean oil has a new use, and it is renewable diesel. It’s really boomed lately. The most recent 12 months of demand is up 18% from the previous year, but even more impressive to me is the plant capacity for renewable diesel.

“We’re seeing strong investment into the construction of new plants to process soybean oil to make renewable diesel. Plant capacity is up 110% from a year ago in August.”

“They’re not going to stop buying soybeans anytime soon.”

—  Todd Hultman, grain market analyst, DTN

Hultman added that another encouraging sign of crush demand is the petroleum industry seems as eager to invest in and be a part of the renewable diesel plants as the soybean processors are.

“So, it’s not like the old ethanol argument that we’ve had for years of fighting the petroleum industry all the way. Now they’re on board. One of the reasons is you can mix renewable diesel with traditional diesel and pretty much into any percentage you want,” Hultman said.

“You can transport it in pipelines. It’s just a very good fuel and it meets a lot of the low carbon economy standards that are being put forth in California, so that’s where the initial market is, but other states are starting to take a look at this and think that it’s also a good fuel for them to promote, as well.

“That explains the big crush incentive returns this year and why we have such strong domestic demand for soybeans and why that basis is so strong even though we just had a pretty decent harvest this fall.”

China’s Demand

The U.S. Department of Agriculture estimates China’s soybean demand to exceed its production by 3.61 billion bushels in 2022-2023.

“That’s a lot of soybeans they have to buy to fill-in the gap. We’re going to have a 220-million-bushel surplus in the U.S. We don’t have 3.61 billion bushels,” Hultman said.

“China heavily relies on Brazil to supply this market for them, but Brazil can’t do it all by themselves either. So, it’s always going to be some combination of the U.S. and Brazil and it’s going to depend a lot on how weather favors or hurts our crops.”

Price Range

Hultman reviewed where soybean prices have been and the potential new price range. Soybean prices were relatively stable from 2014 to 2020 as ending stocks hung in the 350 million- and 550-million-bushel range.

“That’s generally a comfortable supply situation for soybeans. We had a big bulge in stocks after 2018-2019 related to the trade tariff dispute with China. At one point we had a USDA estimate of over 1 billion bushels of soybean ending stocks for a while, but the market did hold up and stay supportive above $8 a bushel. Fortunately, that big supply situation didn’t last long,” Hultman said.

At about the same time, that corn price broke out in late 2020, early 2021, and went to new highs, so did soybeans. That was accompanied by stronger than expected buying from China.

“Instead of ending stocks of 450 million or 500 million bushels, now we’re talking about a new scenario where the ending stocks estimate this year is 220 million bushels. It’s a much tighter situation and not a lot of margin from here in U.S. soybeans,” Hultman noted.

“I would say given the demand estimates and the state of demand that we have in soybeans, that 220-million-bushel estimate is pretty solid. I don’t think there’s a lot of room for that to go higher in the year ahead. There can always be a surprise happen of something we don’t expect, but that’s a very solid estimate so far.

“We’re roughly in the middle of the $12- to $18-bushel new range that we’re kind of exploring in soybeans.

“Soybean demand is so hot right now I would confidently expect $18 a bushel in the months ahead, but there’s another factor at work and that’s Brazil.”

If the weather cooperates, Brazil is on track to produce a record soybean crop of about 5.6 billion bushels that could cause some down-pressure on U.S. soybean, but demand remains high.

“The U.S., Brazil and Argentina are the top suppliers of soybeans in the world and account for basically all of the world’s export supply. If you want soybeans, you have to go to one of those three suppliers,” Hultman said.

Tight Supplies

Brazil’s current crop season that ends Jan. 31 will have ending stocks of about 83 million bushels. Argentina crop season ends two months later and they’ll have about 203 million bushels of ending stocks.

“We’ve got a situation where there’s not a lot of margin for error worldwide speaking when it comes to soybean supplies,” Hultman said.

“If Brazil has a huge crop and supplies the export market and basically shuts us out through the winter and into early next fall, then that’s going to be tough on our soybean prices. But if Brazil and Argentina fall short for any reason, then all of a sudden have a strongly supported tight supply market here in the U.S. right down to the end of August.

“Brazil has expanded its crop acreage by 83% in the last 13 years. The crop they’re planting right now will be their 17th consecutive crop with expanded acres. They increase their soybean acres rough 2% to 2.5% year after year. That is where the competition is.

“Argentina’s soybean acreage is down 11% over the last 13 years. They don’t have the same land base to expand into that Brazil does. It’s just a real bearish threat to keep our eyes on in the future is Brazil.”

Marketing

Hultman said it’s a “tough call” whether to sell all or some soybeans because of the uncertainty of the size of the Brazil and Argentina crops, “but I do think time is on your side until early January to give this market a chance to trade higher.”

“We’re in a very strong demand situation. The soybeans are mostly stored away for the season, and if it wasn’t for the prospect of record production in Brazil, I would say hang on until the seasonal highs usually hit in June,” he said.

“Typically, you want to be out of your soybeans before July 4, and I would be very confident to recommend that you just hang in there and maybe start phasing out of your soybeans in spring and early summer. But because of that Brazil issue, I think there’s good reason to at least sell half of your crop before early January.

“We’ll see in January what the outlook is for Brazil and Argentina, but that prospect of record production in Brazil is really the only major risk that I see at this moment.

“China is really not the risk. China’s soybean demand still looks very good in spite of all the negative headlines. Their soybean and soybean meal prices are holding quite firm and they remain active buyers in the import market.”