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China’s ‘extraordinary demand’ has buoyed soybean market

“The demand pace for soybeans has been such that, as we go into early spring, we’re going to see stocks levels that we would probably not normally experience," says David Glidwell, Mid-South regional manager for ADM at Marion, Ark. “Soybean stocks are going to be very tight in the U.S. this year," he said at the Mississippi Farm Bureau Federation's annual commodity conference.

The U.S. is on track to have a very tight soybean carryout this year, due almost entirely to the “extraordinary demand from China,” says David Glidewell, Mid-South regional manager for ADM at Marion, Ark.

“Nobody in the farming business can afford to ignore China, or how important it is to the world and U.S. ag economies,” he said at the Mississippi Farm Bureau Federation’s annual commodity conference at Jackson.

While China is “the world’s largest producer of corn, soybeans, wheat, rice, cotton, pigs, ducks, chickens, and on and on,” he says, “they consume the vast majority of that production. To date, the only ‘crop’ they have not been self-sufficient in is protein,” and that lack was a boon for U.S. soybean producers in 2012.

A key reason, Glidewell says, is the shortfall in the South American soybean crop the previous year, “which gave us the sandbox pretty much to ourselves” for several months. “The demand pace has been such that, as we go into early spring, we’re going to see stocks levels that we would probably not normally experience.

“Soybean stocks are going to be very tight in the U.S. this year. However, we would not expect any degree of exports this summer, because the South Americans will take over world’s import needs with their large crop that will be coming off, “one of the largest on record.”

The world soybean stocks-to-use ratio is “a little more comfortable than the U.S.,” Glidewell says. “While the Midwest drought trimmed the U.S. soybean crop in 2012, there was not near as much yield destruction as in corn. With rains in late August and cool temperatures, soybeans proved once again they’re a pretty resilient crop, and yields were not much under 40 bushels per acre. The South, particularly the south Delta, had a very good soybean crop, as was the case with corn.

“The world soybean stocks-to-use ratio got tight because of the big shortfall in South America. The U.S. has had its stocks drawn down in making up that shortfall and supporting the tremendous demand in China.”

The U.S. stocks-to-use ratio for soybeans is even tighter than for corn, Glidewell says, “and some would suggest the stocks numbers are overstated. Most would say, though, that at some point we’ll wind up around 135 million bushels of carryover — which is not panic mode, but is tight.

“That means some areas of the U.S. will be really tight and will have to import soybeans from other parts of the country to run crushing plants, or some crushing plants might have to idled. The really tight stocks-to-use ratio that’s being projected is a direct result of the huge demand, and the bigger market share the U.S. saw this past year as a result of the South American shortfall.”

Chinese consumers’ demand for a diet more meat/protein-based has caused their demand for corn “to explode,” Glidewell says.

“But China has remained noticeably absent from the world’s corn markets as an importer. They did import some from the U.S. in 2012, then cancelled and sold back some of it, and made some money on it. I think everyone was expecting them to be a larger importer of corn than they ended up being. Their actual production ended up being a little closer to their usage pace. Who knows if they’ll enter the world corn market this summer? And if they do, it may not necessarily be U.S. corn that they import.”

Assuming no significant economic changes in the Chinese economy, their demand for corn and feed grains will continue to increase incrementally, Glidewell says, and “at some point they’ll have to enter the world market to import some percentage of their needs — that’s potentially a good thing for U.S. corn producers.”

China’s stocks-to-use ratio right now is based on official Chinese government data, he says, “which is relatively comfortable, still hovering around 26 percent. The farther above 20 percent you are, the more comfortable you are.

“The Chinese maintain large reserves of corn and all the basic commodities, and at present they’re seen as having an adequate supply of corn. There are still questions about this year’s crop and whether they’ll enter the world market.

“We think they will be a mild buyer, a not very significant buyer, through the summer. But they’re very savvy traders, and price will have a lot to do with when, and to what extent, they enter the world grain markets.”

China has adapted more modern farming production techniques, including hybrid varieties, Glidewell says.

“They’re buying expertise in agriculture — just as they are in other sectors. As a result, their yields continue to go up. There is room for more yield appreciation, and by and large — especially in the northern corn, soybean, and wheat-growing areas — they’re becoming more like U.S. producers insofar as size, scale, etc. Yields aren’t quite as high as the U.S., but they’re rapidly moving higher.”

The effects of last year’s drought “really tightened the supply of U.S. corn,” Glidewell says. “We’re down to a 5.3 percent stocks-to-use ratio — the tightest in my grains career. We got close to that in 1996, but this is one of the tightest ratios we’ve seen in many years.

“With a 602 million bushel carryout projected for this year’s crop, it tells us that somehow the market will have to ration corn. We’ll have to see some potential rationing of corn this summer. This can come in many different ways: higher prices, users can find ways to stretch the existing supply by substituting other feed grains and components, or some potential cuts in the grind rate of ethanol.”

Glidewell says a 602 million bushel carryout “is close to, and some would suggest below, the pipeline supply level — the minimal amount needed to support industries dependent upon corn.

“I think the one area we’ll continue to ration is the export sector. The U.S. doesn’t need to export any corn with this kind of extremely low carryout and stocks-to-use ratio. So, we’ll probably see little export activity for U.S. corn until the new crop starts coming in.”

Projected world ending stocks numbers have drifted considerably lower from last year, Glidewell says, to some 60 million metric tons, largely the result of the U.S. drought. “The world stocks-to-use ratio is still very tight, under 15 percent.”

Wheat stocks worldwide, for all classes, are “still a comfortable 26 percent to 27 percent,” he says.

“Because wheat is grown in so many areas of the world and is a staple food, world stocks can recover more quickly from a shortfall in one part of the globe. U.S. wheat stocks, as a whole, are not at a burdensome level, but are a very comfortable 29.5 percent.

“I think feed demand will be an important component going through the summer, as the market searches for alternatives to corn. The soft red wheat that we grow in the South is today the cheapest wheat in the world, and that bodes very well for capturing demand that should show up between now and July.

“Hard wheats are a little tighter. World stocks have been drawn down sharply due to the drought in Russia and Ukraine this past year, and to some extent in Europe. While they’ve come down some 20 million metric tons, we still have comfortable world stocks.”

Weather “will continue to be the single most important fundamental factor in the grain markets in this area of very well aligned supply and demand,” Glidewell says. “We can’t afford a significant shortfall in any major commodity without a significant price reaction.”

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