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2018 outlook for feed costs: soybean

Huge supplies, increasing production and an efficient, coordinated global chain fuels low cost soybean meal, cheap feed and high profits.

Tuesday 6 February 2018 (14 days ago)

We continue our discussion of the underpinning of expected profitability for pig producers in 2018. In the U.S. at the end of January, the profit expectation for this year at $25/head is nothing short of stunning. Notwithstanding the historic profits accruing in 2013 and 2014 due to PEDv which reduced supply by about 10% or a little more, you must go back to 2010 to find a year that produced the profitability expected for 2018. Total hogs slaughtered in the US in 2010 were just over 110 million head with an average weight of 272 lbs. live weight. For 2017, USDA reveals that total slaughter was 121.3 million head averaging 283 lbs. Total production for 2018 is expected to be from 2-4 percent higher depending on the forecaster. At the same time, the industry is expecting profits which were typical in the boom part of the “boom-bust” hog cycles of the 1950s-1980s where hog production got the nickname “mortgage lifters”, as pigs often paid the farm loans down for all the other agricultural endeavors including crops, dairy and cattle.

Feed outlook is a key part of profitability and as we mentioned previously, the outlook for 2018 is the continuation of relatively low and uncharacteristically stable total feed costs. Last time we examined the situation regarding corn and this month we turn our attention to soybean meal, which along with corn are the typically preferred main ingredients in swine diets and together largely determine the total cost of feed. While many other grains and oilseeds can be substituted for both corn and soybean meal in the diet, each substitute has a set of issues which make them on average, less desirable.

As you might suspect, areas of the world which are leading corn producers are also leading soybean producers as the two crops can have certain cost saving advantages in rotation and the land characteristics required for top production are similar. USDA Food and Agriculture Service (FAS) report that preliminary 2016/2017 as well as 2017/2018 projections show the largest production worldwide comes from the US and Brazil which run nearly neck-in-neck with a slight advantage to the US (120 million metric tons (MMT) and 110 MMT respectively), followed by Argentina (56 MMT), China (14.2 MMT), India (10 MMT), Paraguay (9.4 MMT) and Canada (8 MMT).

Asia as a continent is the largest importer of soybeans by a wide margin with China leading the way at the country level. The rapid expansion and transformation to modern production methods for poultry and for swine has largely driven this demand. The EU-27 is a big importer of soybeans with countries focused on swine and poultry production (Netherlands, Germany, Spain, France and Italy) taking the largest shares.

In the big picture global trade flows, South America largely exports to China, Europe and Malaysia whereas the US focus is China, Mexico and Japan. Therefore, conditions in any of those regions affecting demand could have an impact on world prices. It is interesting to note that the large commodity merchandisers finance the Brazilian crop by providing the inputs (rather than cash) under contract for the production and then control the product movement to final sales destinations. As such, they organize production such as genetics, inputs used, assembly of the crop, transportation and further processing, such as to meal and oil as integrated units. Arrangements like this in the US match genetic traits from seed producers within regions where optimal growth for that genetics can be realized. The product characteristics are matched with global demand so that a small number of companies coordinate and execute a global business strategy in soybean production, transportation, assembly, processing, export and direct sales.

Brazil is growing in terms of acreage planted whereas the United States is growing more slowly through genetic progress and gradually increasing yields. Land use issues are a hot topic in Brazil and a significant portion of the land under production is former forest land with limited top soils and lower long-term productivity potential. Nevertheless, production is growing each year adding to the global glut of feed grains and if rapidly expanding animal production should slow down, which seems likely in the following year, a dramatic oversupply situation could rapidly develop. All these conditions create an intermediate term abundance of grains and oilseeds used as animal feed enabling low and stable costs of production for global livestock producers. The offsetting hemispheres of major production also result in new crops every half year which mitigates against extended periods of low supply during regionally adverse planting or growing seasons in one hemisphere. Just like corn, stocks of soybeans are very high as is global production and all of these leads to an expectation of continued higher than expected profitability if growth in pork demand continues. More on that next month.

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