TURF WAR:
Diversion: Possible
The market, for quite some time, was obsessed with where all those US soybeans were going, if not to China. Elsewhere was the possible, but unproven, answer. But would they? After last Friday’s export sales report, the diversion to non-China destinations is largely in the data.
TURF WAR: Diversion: Possible
The market, for quite some time, was obsessed with where all those US soybeans were going, if not to China. Elsewhere was the possible, but unproven, answer. But would they? Yes, was the slowly-accumulating answer – until last Friday. Then, a monster US export sales report removed much of the doubt. The required diversion to non-China destinations remains incomplete, but it is now largely in the data.
The situation, on data released to date, means the US is likely exporting at the pace required for the current USDA forecast. Such assessments require assumptions about the normal seasonal pattern for exports. The template we use* suggests US soybean export commitments are running about 1mmt behind. That gap is a modest 2% of the USDA’s forecast. Of course, this season is anything but normal, so any template is much less reliable than usual. More so than usual, markets have used anecdotes, reports and scuttlebutt.
China’s purchases, even based on their (low) 12mmt commitment, account for all that 1mmt gap. China’s purchases, though, were never going to match any template this season. Instead, the trade war, and then trade truce, determined their timing. Market chatter had already suggested China was much closer to meeting its commitment than available data suggested. And now media reports are providing some degree of confirmation. The market will look for confirmation in forthcoming US export data. With China’s export commitments at almost 9.5mmt, the chatter and reports are highly plausible.
Non-China exports are more important this season. The exports will need to be 30mmt or so to meet the USDA’s current forecast. That quantity is large, but not unprecedented. US exports to non-China destinations exceeded that level in seasons 2018-2020. Commitments are already at 23.6mmt, including all 3.3mmt of “Unknown” destination sales. Non-China commitments are thus 78% of the 30mmt export target. The template pattern suggests sales are running at least at the required pace, if not a shade better. Here too, though, the template is less reliable than usual. The non-China sales pace perhaps needs to be faster, given the larger target. However, even a template based on 2018-2020 suggests the pace is a shade better than needed to realise export forecasts. Selling the final 6.4mmt will be more difficult given that large-scale Brazilian supply is now building. However, 6.4mmt is a modest volume. And South American supply always bulges at this time of year – the challenge is that it is set be somewhat larger.
Non-China exports, even now, mean that diversion is now much more real than theoretical. And, as such, is a validation of the diversion thesis. Export diversion, though, is not doing all the work in resolving the US soybean issue. The US is also crushing more of its soybean crop, reducing the pressure to export soybeans. The USDA expects the US crush will be about 60% of soybean production this season. That proportion is similar to the previous peak in 2019 (see chart below). Diversion, though, is not the primary driver of the trend rise in US crush. The US biodiesel mandate is. Both, the larger mandate itself and deferred realisation of that mandate, generate the trend growth in US crush. The biodiesel mandate, of course, only deals with soybean oil. The much larger quantity of soybean meal the mandate generates is the tougher issue for the industry. Long story short, the solution is soybean oil prices high enough to keep US soymeal exports profitable. US soymeal export sales are forecast to be 40% higher than five years ago.
Finally, the US Dollar’s decline against Brazil’s Real has helped US exports. Without that decline, US soybean prices would likely have been lower.
* Specifically, the median share of export commitments for week X for seasons 2010-24, ex. 2013, 2017, 2018. Two sets of shares are generated, one for China and one for non-China sales. back
