Soybeans and Oil Crops: Market Outlook

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Oil Crops Outlook

USDA Soybean Baseline, 2010-19

Each year, USDA updates its 10-year projections of supply and utilization for major field crops grown in the United States, including soybeans (see Overview of the USDA Baseline Process for more information). One key use of the projections is as a reference from which to analyze the impacts of potential policy changes affecting U.S. agriculture. This discussion summarizes the analysis underlying the soybean projections for 2010-19. Details about the projections for the U.S. macroeconomy, other U.S. crops, U.S. livestock, the U.S. agricultural sector, and global agricultural trade can be found in the Agricultural Baseline Projections briefing room.

Supply

Several factors underlie the long-term trends that will determine the size of U.S. soybean crops during 2010-19.

Although expected net returns for planting soybeans might become less attractive throughout the Corn Belt, it continues to expand in areas historically dominated by small grains (the Northern Plains in particular). Stagnant spring wheat yields and the development of better yielding short-season soybean varieties adapted to the northern climate have facilitated a shift away from wheat toward soybeans. For instance, soybean acreage planted in North Dakota has more than doubled since 1999. Soybeans have been welcomed into Northern Plains crop rotations to help break the cycle of wheat diseases and, unlike in more traditional soybean producing regions, returns per acre favor soybeans over many other crops.

Recent U.S. soybean yields have been excellent. While soybean acreage is still expanding into northern and western parts of the country, those areas tend to have lower yields than the core midwestern production region. This expansion and a tapering off of the yield gains from narrow-row planting have slowed the upward trend in the national average yield. Throughout the 1990s, adoption of narrow-row planting practices benefited soybean yields as it usually increased the number of pods per acre. In more recent years, there has been a clear shift away from 7- to 8-inch rows toward 15-inch rows in an effort to improve air circulation and combat disease-related yield losses. In 2009, ample summer moisture led to a record yield of 44 bushels per acre. Incidences of Asian soybean rust in the United States have been limited to the South, where losses have been minimized by timely application of fungicides.

Demand

Over the next 10 years, several long-term trends will determine domestic and foreign demand for U.S. soybeans and soybean products.

Exports from South America have expanded rapidly. South American soybean harvests have set record highs nearly every year for almost a decade. Over the past 5 years, exports from the region have surpassed U.S. foreign trade in soybeans. However, that trend was interrupted for the 2009/10 marketing year (September-August). In 2008/09, Argentina suffered from a historic drought that slashed soybean production and exports.  In Brazil, the 2008/09 soybean area was constrained by high production costs and poor financing.  Although Brazil’s exports in 2008/09 soared to fill the void from Argentina’s small crop, carryover stocks were drawn unusually low. Consequently, U.S. exports for 2009/10 are expected to increase to a record high due to a higher supply and low stocks in South America.

Domestic soybean use not dynamic. Intense competition from soybean processors in Brazil, Argentina, and, more recently, China has eroded foreign soybean meal markets away from U.S. crushers. China has also imported large amounts of U.S. soybeans that would otherwise have been available for crushing. Domestic crush margins have suffered from a declining supply and comparatively weak prices for soybean meal and soybean oil. In addition, domestic consumption of these products has not grown very much. Consequently, the domestic crushing pace is starting to slow down even earlier in the year.

Growth in domestic soybean meal use is gradual. The low rate of growth in U.S. soybean meal consumption is determined by a comparatively slow expansion of meat production and a rising supply of substitute protein feeds. Also, over the last decade, intense competition from soybean processors in Argentina and Brazil with U.S. crushers has gradually cut into the U.S. share of foreign markets for soybean meal and soybean oil.  China's processors have also imported large amounts of U.S. soybeans that could otherwise have been available for domestic use. Lackluster domestic use and the pressure of foreign competition kept U.S. prices for soybean meal and soybean oil comparatively low. Thus, whenever soybean supplies fell, profit margins of domestic processors would stagnate.

Over the past 4 years, however, record domestic supplies of soybeans have improved the economic conditions for U.S. processors, while adverse weather has disrupted crop supplies for Brazil and Argentina.  In addition, an expansion of biodiesel production throughout the world is raising the value of soybean oil relative to soybean meal. In order to produce soybean oil for a growing biodiesel industry, its joint output with soybean meal is creating a larger exportable surplus of meal. 

Biodiesel is leading consumption gains for soybean oil. For the past 5 years, food demand for soybean oil has stagnated as food manufacturers have sought out vegetable oils that are low in trans-fatty acids.  Eventually, a wider distribution of low-linolenic and high-oleic soybean varieties could diminish these disadvantages. Offsetting the weak food demand are gains in U.S. production of biodiesel, which uses soybean oil as a major feedstock.  New construction of biodiesel production facilities was accelerated by passage of a Federal tax incentive starting on January 1, 2005. The exemption, which was extended through 2009, provided a Federal excise tax credit (at 1 cent per gallon for each percent that is used in a fuel blend) to blenders using biodiesel.  Until early 2009, a majority of the output was exported. Recent exports were reduced due to the abolition of the blending credit for re-exports of biodiesel imports and the European Union’s imposition of countervailing duties on imports from the United States.  Biodiesel contributes to the lubricity needs of low-sulfur diesel fuel, as required under recently implemented emission standards. Biodiesel now accounts for about 13 percent of the domestic use of soybean oil.

Although U.S. exports of soybean oil are expected to increase in 2009/10 to a record high, rising demand for soybean oil in domestic biodiesel production will likely constrain them in subsequent years. Since 2003/04, the United States has been a net importer of all vegetable oils and a continued expansion of biodiesel output would amplify the trend.  Considerably higher costs for vegetable oils and competition from biodiesel imports would temper the industry’s growth.

Projections for U.S. Soybean Supply and Use

U.S. soybean projections for 2010-19 include the following highlights.
Projected soybean acreage initially declines and stabilizes later. In 2010 and 2011, planted soybean area in the United States is expected to decline. By the spring of 2010, it is assumed that producers will react to the price pressure from bumper South American harvests. Most of the reduction will come from producers switching to corn in the traditional Corn Belt, although some will be in the South due to lower double-cropping with wheat and substitution with cotton. Despite lower acreage, total 2010/11 soybean supplies are projected to increase moderately due to a larger carryover from 2009/10. The 2010/11 carryout could be even bigger and is projected to depress the 2011 soybean acreage to 73.5 million acres. Soybean acreage could recover to 76 million acres by 2014 and remain steady through 2019.  It is assumed that a reduction in the maximum enrollment for the Conservation Reserve Program will help return more than 2 million acres of cropland in 2010, which in later years could help support U.S. soybean acreage.

Gradual output growth supports domestic needs and U.S. exports. Assuming lower acreage in 2010/11, supply could expand moderately due to ample carryover stocks.  Thereafter, a slowly rising supply is projected, supporting a gradual increase in domestic use and exports.  Domestic crushing could increase moderately toward 1.86 billion bushels by 2019/20.  Assuming a steady increase in domestic demand for soybean meal and soybean oil, the soybean crush is projected to rise by 15-20 million bushels per year.

In 2010/11, large expected supplies by export competitors could reduce U.S. soybean exports to 1,300 million bushels.  Assuming a strong expansion of foreign exports, the U.S. share of the global market could be reduced within 10 years to 38 percent—compared to 45 percent for 2009/10. Nevertheless, rising foreign imports could boost U.S. soybean exports to 1,455 million bushels by 2019/20.

The U.S. export share of the world soybean oil market is also assumed to shrink for several years as domestic users take more of the available supplies (particularly for biodiesel). Foreign import demand for soybean oil should stay robust, though.  Vegetable oil imports by the European Union (EU-27) are expected to rise rapidly to meet ambitious targets for biofuel production. In South America, rapidly growing domestic markets for biodiesel will likely compete for soybean oil supplies and constrain exports.

The U.S. share of global soybean meal exports is benefiting from ample supplies in 2009/10 and may reach a record 10.2 million tons.  In subsequent years, however, the market share should gradually erode despite growing in absolute terms.  U.S. soybean meal exports are projected to edge up to 9.8 million short tons by 2019/20 from 9.4 million for 2010/11.

Projections for World Soybean Trade
During 2010/11-2019/20, gains in world soybean trade will probably moderate from the 7-percent annual growth in 1999/2000-2008/09, but the upward trend is far from peaking. Global soybean trade is projected to rise nearly 3 percent annually to 104 million metric tons in 2019/20.

China will dominate world soybean imports. The growth in China’s soybean imports is assumed to dwarf all other countries, accounting for 78 percent of the projected gain in world trade by 2019/20. By 2010/11, the volume of soybean crushing in China could surpass that of the United States, the world's current leader. That development would likely promote a faster growth rate for global soybean imports than for soybean meal and soybean oil. However, any disparity in the rates of consumption between protein meal and vegetable oil in China could temper that expansion. China's imports of vegetable oil will likely rise, provided that its consumption continues to grow faster than its domestic demand for protein meal (and including its ability to export possible meal surpluses). China has already surpassed India as the world's largest importer of soybean oil.

Brazil closes the gap on U.S. production and exports of soybeans. The United States, Brazil, and Argentina collectively account for more than 90 percent of world exports of soybeans, soybean meal, and soybean oil.  Although the same 3 countries will stay on top, Brazil is projected to satisfy most of the growth in global soybean exports. By 2019/20, Brazil will approach the United States as the world's leading soybean exporter.