Weathering Soybeans’ Geopolitical Storms | Third Quarter Outlook

This is an abridged version of the soybean outlook for Q3 2024 from Terrain, our service for agricultural insights. For the full text of this article, visit terrainag.com.

Election Won't Erase Trade Volatility with China

U.S. government policy has an important influence on grain and other agricultural markets. Take, for example, the ethanol boom over 15 years ago or recent efforts to find low-carbon fuel like renewable diesel, increasing domestic soybean crush capacity.

Export markets are no exception.

The U.S.-China trade war in 2018 limited soybean exports, though levels normalized two years later, with record U.S. soybean exports in 2020/2021. Since then, exports to China — the largest importer of U.S. soybeans — haven’t quite returned to pre-trade war levels.

A March 2023 survey by Pew Research Center reveals that more than 80% of Americans have an unfavorable opinion of China and 62% view its partnership with Russia as a very serious problem for the U.S. Additionally, both the Trump and Biden administrations have imposed tariffs on Chinese imports. These factors help demonstrate that trade with China is a bipartisan issue.

Therefore, regardless of who is the next U.S. president, grain producers should be prepared for ongoing trade volatility with China. Also, given the inconsistency and instability of China’s demand, the U.S. soybean industry must seek alternative demand outlets to support prices.

Nurturing Domestic Demand

Even if a trade war doesn’t reemerge, China’s demand for soybeans will not be as robust as before, as the country’s demand for feed and general economy are showing signs of softening. Future U.S. soybean prices will be pressured unless there is a significant increase in crush demand in the U.S. to make up for the lack of exports. In this scenario, soymeal and soybean oil values would support prices.

With multiple federal and state regulations focused on reducing carbon emissions, renewable diesel production and, therefore, soybean crush plants have expanded in the last few years, with 12 new crush plants slated to come online by 2026.

While many feedstock options exist to produce renewable diesel, each is based on a carbon intensity score. Animal fats and used cooking oil have the lowest scores (given they are considered waste products) and, thus, the highest profitability with increased tax credits. Conversely, the benefit of soybean oil used as a feedstock in renewable diesel production is the sheer availability of the product here in the U.S.

However, it’s important to note that when a soybean is crushed, only 20% of the composition is oil, with the remaining 80% being soymeal. As the crushing industry has expanded, so have U.S. soymeal exports, increasing 8% in 2022/2023 per the USDA. We must generate significant demand for the additional soymeal if soybean oil is to continue to expand as the primary feedstock for renewable diesel.

While it is hard to predict how much global demand soymeal will generate as it becomes more accessible with lower prices (caused by an increase in supply), we do know that consumption grows with population and middle-class expansion.

Rather than focus on export soybean demand from China, the U.S. should foster new export relationships for soymeal and use soybean oil as the primary feedstock for renewable diesel. Policies that support U.S.-produced crushed byproducts would ensure domestic soybean demand and help our country’s low carbon fuel initiatives.

Continue reading outlook at TerrainAg.com.