Global soybean market faces challenge to adapt in 2020

The global soybean market will have a tough job in 2020 adapting to the impact of the most recent chapters of the US-China trade dispute, the prolonged influence of African swine fever on Chinese consumption and the rise of Brazil to the top spot in global production rankings.

The US-China trade dispute has dragged on for 17 months after initial tariffs went into effect July 2018. Over the period of continued negotiations, additional tariffs have been added by both countries. The prolonged uncertainty transferred the majority of China's 2018 soybean purchases to Brazil. US soybean exports to China have seen a sharp increase compared with 2018, but major purchases have only been executed when the Chinese government has issued tariff exemption waivers to drive the trades.

The new year is expected to bring confirmation of and more detail on phase one of a trade agreement between the US and China that includes a commitment by the latter nation to buy an additional $32 billion of American agricultural products over a two-year period.

On the last day of the year, US President Donald Trump used Twitter to say he will be signing a "very large and comprehensive Phase One Trade Deal with China on January 15."

That deal should set the tone for 2020, but its exact consequences are still unclear.

While it is a positive development for the longer term for US producers, it may have limited impact on the US soybean market during the current marketing year. Chinese crushers are understood to have covered most of their needs through January, and once the harvest of Brazil's new crop is completed, US soybeans will no longer be being offered at competitive pricing.

In Brazil, the deal has cooled trading activity in recent weeks, as market participants wait for more clarity on Chinese demand for both the short and the long term.

"Everybody seems to be in 'wait and see' mode," said a Brazilian trader.

CHINA'S IMPACT

Questions remain around what actual demand for soybeans in China will be in 2020, as the country tackles African swine fever outbreaks with new sanitary measures, changes in pork production systems and an increase in meat imports.

While the behavior of China - the top global soybean buyer - remains the largest question mark for 2020, the supply side may also require more adaptation in the year ahead.

A historically wet spring planting season in the US caused a major cut to annual production, but the ongoing trade dispute and low Chinese demand weighed on US soybean pricing for all of 2019. In the December US Department of Agriculture World Agricultural Supply and Demand Estimates report, the projection for 2019-20 crop year was 75.6 million harvested acres, a 12 million acre drop from 2018-19.

One of the other results of the US-China trade spat was a program from the USDA known as the Market Facilitation Program.

The MFP began in 2018 to issue funds to US farmers and trim the losses being seen as a result of the drop in export demand. The payments in 2018 were based on production, but the program was adjusted in 2019 to be based on planted acreage. A 2020 extension of the MFP program has not been officially announced, but the prior payments have provided motivation for farmers to keep planting. Early analyst estimates for 2020 show a 7.5 million-9.5 million acre increase in US soybean plantings on an improved year-on-year weather outlook and potential support from government programs.

Brazil, on the other hand, is set to harvest the largest soybean crop ever seen in anywhere in history, which should consolidate the South American country not only as the world's largest exporter but now as the largest producer.

Estimates by government agencies and private analysts hover around 122 million-124 million mt, up from 117 million mt in 2018-19. Most of the projections were made in early December and a new round of predictions should be issued in the first couple of weeks of January.

"Yield estimates in December were the result of the first yield survey conducted for the new crop, replacing the estimates based on historical trends. As planting was delayed this season compared to the previous year, the size of the total Brazilian crop is still undetermined. A new revision will be made in mid-January, when the harvest will already have kicked off," said Fernando Muraro, chief analyst at AgRural.

If the outlook for Brazilian exports remains unclear, the domestic scenario looks positive. Consumption of soybean oil should increase as the biodiesel blend mandate will be increased to 12% from 11% in March.

According to INTL FCStone analysts, soybean meal use in Brazil will also be strong, as the country grows its meat exports - beef, poultry, pork - led mostly by shipments to China.

-- Gustavo Bonato, gustavo.bonato@spglobal.com

-- Luke Lundgren, luke.lundgren@spglobal.com

-- Edited by Keiron Greenhalgh, newsdesk@spglobal.com