The ethanol market has been high octane lately. Private Chinese buyers are coming to buy US corn. Livestock numbers are up and feed demand will be high.

As a result, corn has been the darling of the market. But what about that other crop we grow in the Midwest? Some kind of beans…oh, yes, soybeans. Why doesn’t any country around the world want our soybeans? Why aren’t they selling for three times as much as corn? Well, the answer may be hidden in the volatility of three economic forces: commodity markets, exchange rates, and ocean freight. After all, the US has been depending on the export market to buy 33% of our soybeans, but only 20% of our corn.

Lacking the intrigue, it is still somewhat of a “Da Vinci Code” puzzle that University of Kentucky ag economists Qiang Zhang and Michael Reed have tried to solve. Their research compares the soybeans markets of the US and Brazil, and looks at the world market for soybeans, with a focus on Mexico, which eliminates the ocean freight issue, as well as China, which buys from both the US and Brazil.

China buys more soybeans than any other nation, sourcing them from both the US and Brazil, and since the Yuan is tied to the US Dollar, the ag economists can study the preferences without the interference of exchange rate volatility. The data indicated the Brazilian price is a key to China’s decision on where to purchase, and because of its volume of purchases, China will make adjustments as soybean prices fluctuate on the world market. When it comes to ocean freight rates, they are not a major concern to China, say the Kentucky economists, since the Chinese buyers will adjust their import volumes based on the bargain of the day. Demand for Brazilian beans is more impact by ocean shipping rates than is the demand for US beans. Mexican demand for soybeans is primarily supplied by US sources. The economists found that exchange rate volatility is a positive for US sales to Mexico, but that market price volatility is a negative on Mexican purchases of US beans.

US vs. Brazil:

• Stronger Dollars or weaker foreign currencies benefit the US and hurt Brazil.
• Higher soybean market prices benefit the US and hurt Brazil
• Higher freight rates hurt the US and benefit Brazil
• More volatility exchange rates, market prices and freight costs hurt the US and benefit Brazil.

China:

• Without exchange rate issues, Chinese preference for US beans significantly increases when Brazilian prices rise.

Mexico:

• Although the US dominates in selling soybeans to Mexico, price volatility hurts US sales, but exchange rate volatility enhances sales.

European Union:

• The EU is the most important market for Brazil, and while it is considered one market and has one currency, there may be opportunities for US soybean sales to individual countries where variables exist in either market prices or freight rates.

Summary:

With a record carryout in soybeans expected for the old crop, and that record expected to be broken by the new crop, soft prices for soybeans could certainly be helped by stronger export demand. But frustrations for soybean traders, as well as farmers, stem from volatility in market prices, exchange rates, and shipping fees for ocean freight. As a result, demand for US beans is a moving target that is hard to hit. However, some of the volatility works to the benefit of US demand, seen as a more solid supplier than our Brazilian competition. Knowing the tendencies of international buyers can help traders sell more beans and help farmers understand the vagaries of the marketplace.

Stu Ellis