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Soybean Market Opportunities, Demand And Supply Outlook

Demand

Global demand for soybeans has increased 145% since the 1990/91 marketing year. This compares with 76% for corn, 35% for cotton, 31% for rice, and 21% for wheat. Growth has been driven by growing demand for protein, and vegetable oil consumption for food. The growth momentum appears set to continue. China, the world’s largest importer of soybeans accounting for two thirds of global soybean imports in 2017 according to UN trade data, imports soybeans for its meat, poultry, and dairy industry which has been booming as Chinese citizens increasingly add more protein to their diets as incomes rise and living standards increase. China is on track to overtake the U.S. to become the world’s largest dairy market according to Euromonitor International, and currently is the world’s largest egg consumer and producer, and the world’s largest meat importer.

Bar chart showing the world's top 5 soybean importing countries in 2017. China was the world's largest soybean importer with total soybean Imports valued at US$ 39.6 billion in 2017, followed by the European Union with US$ 3.7 billion, Mexico with US$ 1.7 billion, Japan with US$ 1.5 billion, and Thailand with US$ 1.2 billion.

Protein intake among Chinese citizens has been steadily growing reaching 96.7 grams per capita per day during 2011-2013 and has reached levels comparable to developed neighbors such South Korea (96 grams per capita per day). However, it has yet to reach levels comparable to other developed nations such as the United States (108.7 grams per capita per day), and Germany (101.7 grams per capita per day) suggesting room for Chinese soybean demand to grow.

Column chart showing average protein supply (in grams per capita per day) (three year average) in China, South Korea, United States, and Germany. In 2008-2010, average protein supply was 91.7 in South Korea, 92.4 in China, 101.3 in Germany, 110.7 in the United States. In 2009-2011, average protein supply was 93 in South Korea, 93.7 in China, 102 in Germany, 109.3 in the United States. In 2010-2012, average protein supply was 94.3 in South Korea, 95.3 in China, 101.7 in Germany, 109 in the United States. In 2011-2013, average protein supply was 96 in South Korea, 96.7 in China, 101.7 in Germany, 108.7 in the United States. Data from the Food and Agriculture Organization of the United Nations.

This is particularly true for animal protein which at 38 g/capita/day (3-year average) in China has not yet reached the levels of neighbors Japan (48 g/capita/day), and South Korea (46 g/capita/day), as well as developed nations such as the United States (69 g/capita/day), and Germany (61 g/capita/day).

Chinese meat demand has pushed up meat imports over the past few years and China is the world’s largest meat importer. China’s growing appetite for imported meat should help drive EU soybean demand. As the world’s largest meat exporter, the EU has been a major beneficiary of China’s growing meat consumption which in turn helped push EU soybean imports; the EU is the world’s second largest soybean importer and the world’s largest importer of soybean meal which is used mainly as animal feed. With China driving global meat demand, soybean demand from the EU, the world’s second biggest importer, is poised to grow as well.

India also presents a tremendous growth driver. Incomes and living standards have been rising and India’s average protein supply is a on a firm uptrend but it still about half of China’s suggesting ample room for growth.

Column chart showing the average protein supply in grams, per capita, per day on a 3-year average in China and India. During 2005-2007, average protein supply was 55 grams per capita per day in India, and 87.4 grams per capita per day in China. During 2006-2008, average protein supply was 56.7 grams per capita per day in India, and 89.1 grams per capita per day in China. During 2007 – 2009, average protein supply was 57.3 grams per capita per day in India and 90.8 grams per capita in China. During 2008 – 2010, average protein supply was 58 grams per capita per day in India, and 92.4 grams per capita per day in China. During 2009-2011, average protein supply was 58.7 grams per capita per day in India, and 93.7 grams per capita per day in China. During 2010-2012 average protein supply reached 59.3 grams per capita per day in India and 95.3 grams per capita per day in China. During 2011-2013 average protein supply reached 59.7 grams per capita per day in India, and 96.7 grams per capita per day in China.

In fact, according to the results of a survey conducted by Indian Market research Bureau (IMRB), 73% of urban rich Indians are protein deficient, with 93% of them unaware about their daily protein requirements. With nearly 80% of Indian households expected to rise to middle income status by 2030, up from 50% today, the U.S. Soybean Export Council sees India as a prime export market in the future.

Supply

The top five largest soybean producers are the United States, Brazil, Argentina, China, and India.

Bar chart showing the leading countries in soybean production worldwide. During calendar year 2018-2019, the United States was the leading soybean producer in the world, producing 120.52 million metric tons, followed by Brazil with 119 million metric tons, Argentina with 55.3 million metric tons, China 15.97 million metric tons, India with 10.93 million metric tons, Paraguay with 8.85 million metric tons, Canada with 7.27 million metric tons, Ukraine with 4.83 million metric tons, and Russia with 4.03 million metric tonnes. According to preliminary figures for calendar year 2019-2020, Brazil was the leading soybean producer worldwide with 126 million metric tons, followed by the United States with 96.68 million metric tons, Argentina with 50 million metric tons, China with 18.1 million metric tons, Paraguay with 9.9 million metric tons, India with 9.3 million metric tons, Canada with 6 million metric tons, Russia with 4.36 million metric tons, and Ukraine with 4.05 million metric tons. Data from the United States Department of Agriculture Foreign Agricultural Service.

China, the world’s largest soybean importer and consumer is likely to remain a major import market in the years ahead. Domestic soybean production meets just about 20% of China’s domestic demand of about 100 million metric tons, and while there is potential for the country to increase domestic output by improving yields (particularly with the government reportedly making efforts to boost soybean production), this is unlikely to satisfy demand so the country will continue to depend heavily on imports going forward.

Even if China doubles its soybean production by doubling its yields to match the United States (China’s average soybean yield on the same area of land is about 40% that of the U.S. according to Heilongjiang Academy of Agricultural Sciences), China could potentially increase its production by about 15 million metric tons, which is not even one-fifth of China’s estimated 84 million metric ton soybean import volume during marketing year 2019/2020 according to data from the USDA.

India, the world’s fifth largest soybean producer, is currently a net exporter of soybeans but its net exports have been declining as domestic production is outpaced by domestic demand which suggests that as incomes grow and protein intake increases, the country may well end up becoming a net importer, unless they dramatically increase soybean yields; India’s average soybean yields on the same area of land is just 25% that of the U.S. according to data from the USDA.

That would leave current soybean export leaders Brazil, and the United States to continue dominating the soybean export market in the years ahead.

The fragility of the U.S.-China relationship suggests Brazil is in a better position to capitalize on China’s soybean demand in the long term, presenting opportunities for Brazilian soybean suppliers. The long term impact of losing China as an export market for U.S. soybeans was abundantly clear when prior to the Phase 1 trade deal, the USDA’s long term projections for soybean planting in the U.S. expected only marginal increases and was not expected to recover to pre-trade war levels.

Agribusiness players ADM (NYSE:ADM), Bunge (NYSE:BG), Cargill, which buy crops from farmers, then transport, store and/or process the crops and sell the processed crops to food, feed, and energy buyers all have operations in Brazil and should benefit from improved South American origination volumes as Chinese soybean imports grow along with rising protein demand.

In the short term however, China will likely to continue to buy U.S. soybeans not just as part of a trade deal secured in January this year which helped end a nearly two year trade war between the two nations, but also perhaps to buy time as the country makes the necessary investments to cost effectively diversify its soybean sources in the long term, since top supplier Brazil may be unable to keep up with Chinese soybean demand. The opportunity in Russia is particularly compelling. Russian soybean exports to China have grown 51 times from just 15,000 metric tons in 2013/14 to 763,000 metric tons in 2018/19. Although this is less than 1% of China’s approximately 100 million metric ton soybean consumption currently, the long term potential is significant considering China’s top soybean producing region – Heilongjiang – is just across the China-Russia border from Russia’s top soybean producing region – the Amur region, which if developed could offer China soybeans at very cost effective prices with the added advantage that Russian soybeans are non-GMO (compared with the United States where 94% of US soybean acreage comprises GMO soybeans as of 2018).

All is not lost for U.S. soybeans however. The EU is gradually phasing out palm oil for its domestic biodiesel use, and U.S. soybeans could be a beneficiary of this move. About half of the EU’s 3.9 million metric tons of crude palm oil imports were used as feedstock for biodiesel, 40% used for consumer products such as food and cosmetics, and 10% used for heating and electricity as of 2017 according to OilWorld. While much depends on the soybean oil content and oil extraction technology, generally speaking, one ton of soybeans can produce approximately 20% soybean oil give or take 5% or so. That suggests that satisfying EU’s oil demand for use in biodiesel would require 10 million metric tons of soybeans, equivalent to about 10% of U.S. soybean production currently, and the byproducts of soybean processing i.e., soybean meal can be used in its growing meat and poultry industry, helping fulfill the EU’s soybean meal requirements. While this represents a potential demand of two-thirds of the 15 million metric tons of soybeans imported by the EU in 2018-2019, it amounts to just 25% of the nearly 40 million metric tons of soybeans the U.S. exported to China pre-trade war.

Nevertheless, it should still cushion the blow for companies such as ADM for whom soybean trading accounts for 16% of revenue with most of their origination from North America. In its latest annual report, ADM’s Ag Services and Oilseeds operating unit saw profit drop 4% which the company attributed to weaker North American grain margins and volumes, in part due to changing weather conditions and the U.S.-China trade tensions. Within the Ag Services and Oilseeds unit, Ag Services (which includes results from its origination business which buys grains from farmers) recorded a 23% drop in operating profit, compared with a 45% increase a year earlier.

The company benefited from China’s increased soybean consumption before the trade war and if Brazil replaces the United States as China’s leading soybean supplier or takes an increasing share of Chinese soybean imports, the EU could help partially fill in the void for U.S. soybean producers and traders such as ADM.