Structure and size of the market

Soybeans is a major crop in Canada, with most production occurring in Southwestern Ontario, also known as Corn Belt 1 and Eastern Ontario/Southwestern Quebec, also known as Corn Belt 2. Soybeans do well under the same climatic conditions that favour corn and are usually grown in rotation with corn, hence the similarity to the corn acreage distribution. Soybean acreage is fairly steady year to year; the overall trend in the past decade has been slight acreage decline in Corn Belt 1, while acreages have increased in Corn Belt 2. Short season varieties adapted for the West have appeared and soybean production is increasing, particularly in Manitoba. Overall, acreage and total production are both increasing.

Statistics Canada 2006-Cat. 22-002-XIB; Census of Agriculture 2001 Table 95F0301XIE

Notes to Table 1: Totals may not add up, due to rounding.

Market Characteristics

Soybeans can be categorized as falling into two quite distinct markets: (1) commodity beans which are generally crushed by domestic processors; and (2) specialty beans which are food grade products, usually exported as whole beans.

Canadian producers of commodity beans are free to market to anyone, with almost all sales made through country elevators. Producers can also sell directly to processors.

The term “elevator” refers to a commercial establishment that holds a license to store grains and oilseeds on behalf of another party. The term “dealer” refers to a commercial establishment that holds a license to buy and sell grains and oilseeds. “Processor” refers to a commercial establishment that physically transforms grains and oilseeds into some distinctly different product.

All elevators have facilities equipped to process grains i.e. dry, clean, clip, destone, polish etc. but do not transform grain. In almost every case, holders of an elevator license also hold a dealer license, and processors such as feed manufacturers may hold an elevator and dealer license as well. Some establishments are corporations; some are co-ops and may have one or several locations. Some offer a complete slate of grower services including seed, fertilizer and chemical sales, pesticide application, crop scouting, harvesting, and trucking, On the marketing side, elevators offer marketing assistance, advice on pricing strategies, and a range of pricing and selling options.

In Ontario, Agricorp delivers the Grain Financial Protection Program on behalf of the Ontario Ministry of Agriculture, Food and Rural Affairs (OMAFRA). The program protects the financial interests of Ontario producers of grain corn, soybeans, canola, and wheat who sell their crop to Ontario licensed dealers. Most Ontario dealers do not hold a Canadian Grain Commission (CGC) license. Dealing with an elevator that has an Ontario license protects the financial interests of owners who store grains and oilseeds.

In Western Canada, elevators are regulated by the CGC. Most dealers who accept soybeans are also holders of a CGC license, but it is not mandatory. It is up to the growers to protect their own financial interests.

Commodity soybeans

Growers can sell soybeans using any or all of the following:

Store on-farm - growers may have facilities for drying and storing beans. As with all grains and oilseeds, soybeans in storage must be monitored regularly to ensure quality maintenance as there is some risk of deterioration. Product can be delivered as the grower sees fit. Growers may be able to take advantage of prices some distance away at any time during the crop year.

Spot or cash market - beans can be delivered to the elevator right from the field and sold subject to grading discounts or premiums. Some years this is a good strategy, as there is no price risk, and payment is received promptly. In years when bin space is at a premium, prices at harvest at certain localities may be under pressure.

Store beans at licensed elevator - beans are delivered and stored, sold as the grower chooses throughout the year. In this scenario, the beans are like money in the bank. There is no concern about storage loss, and beans can be sold with a phone call.

Grower sells according to conditions on target price contract or resting order -typically the elevator will sell the beans when the price reaches some target price. If the target price is not reached, the beans are not sold. This type of contract frees the grower from constantly guessing and second-guessing the best time to sell. On the other hand, a target that is too high may result in missing good selling opportunities, and leave the grower with unsold beans towards the end of the crop year when cash flow demands are highest, and selling options are few.

Grower sells beans before harvest - many growers sell a proportion of the crop if prices for future delivery are reasonable. This strategy removes some of the risk of a price drop.

Specialty soybeans

Specialty beans are typically sold on contract. These contracts will fix a price in advance or more typically a basis (certain premium over the CBOT) before planting. The elevator issues the agreement, which will stipulate seed, separation from other bean fields, recommended weed control and advice on other agronomic issues. In return, the elevator will agree to buy the entire crop. There are more than 10 categories of specialty beans.

Marketing of specialty beans is done before the planting decision is made. Most specialty beans are Identity Preserved (IP). IP refers to the Canadian Identity Preserved Recognition System (CIPRS). CIPRS is a protocol that protects purity, creating an auditable trail that includes the seed producer, the soybean grower, the elevator and the shipping system. Soybeans are sampled and analyzed at certain steps along the way. Identity-preserved soybeans are stored and shipped separately and are subject to independent third-party audits and certification.

Approximately 75% of soybean exports to Asia are classified as identity-preserved.

Key Changes or Recent Issues

The big story in the soybean market is rapidly emerging alternative fuel markets. Canada and the U.S. are following the European lead in production of biodiesel, or diesel fuel from vegetable oil. Fuel is designated as ‘B’ number, with the number indicating the percentage of vegetable oil. The industry goal is to have all fuel B15 (or 15%) by 2015. Continuing high energy prices will draw large quantities of soy and canola oil. This has far reaching implications for producers of all grains as the economics change.

These developments are profound and unknown, and will be affected by factors including:

• Tax and other support structures for biodiesel producers.
• Legal requirements for biodiesel percentages.
• Ability of the livestock and other industries to absorb byproducts of the biofuel processes.
• New uses for byproducts.
• New processes for biofuel production.

Price Discovery

Prices for commodity soybeans are set on the Chicago Board of Trade (CBOT) markets. Canadian prices are set using these prices. The difference between the U.S.price and local Canadian prices (the basis) varies with local demand. Occasionally at harvest time certain localities will experience a significant price drop for a short period of time. However soybean prices do not vary substantially among locations, as soybeans are freely traded across the Canada-U.S. border. Prices for the specialty beans destined for the food trade, (export) are also ultimately based on the U.S. prices, with contracted premiums.

Soybean futures prices are also set on the CBOT. These prices are the base for pricing contracts for future delivery of beans at local elevators, and are a guide for growers as they make planting decisions.

It must be understood that soybeans are a globally produced and traded commodity. Brazil is a major supplier and has a production base that is low cost and continues to expand. Keeping abreast of developments in this country is critical to understanding soybean markets.

Key Quality Issues

Quality criteria in commodity beans are defined by the grading standards set out by the Canadian Grain commission.

In the case of specialty beans, quality control is a much more rigorous process, which requires industry participants to work together to satisfy market demands for specific products. In this regard, seed companies develop specific traits for a specific market, producers plant under controlled conditions, weeds are controlled, beans are harvested carefully to avoid damage and splits, the elevator uses its processes to clean, and further prepare, and segregate, and so on. In general, these beans must be of good appearance, round, undamaged, sound, mature, free from weed stains and dirt.

The elevator also controls the delivery of the soybeans, ensuring that delivered beans do in fact meet specifications. Elevators check deliveries from farms to ensure that all quality criteria are met before allowing product to be unloaded.

Elevators handling food-quality beans are equipped with processing equipment including sizers, clippers, gravity sorters, de-stoners and polishers.

Risk Factors

Soybeans are an unregulated commodity in North America. Soybean prices are determined by free market interaction of supply and demand. Each year growers can easily move acreage in and out of soybeans to take advantage of changing prices for other crops, specifically corn.

The soybean market is tied to the overall economy in a very complex web of causes and effects. To illustrate: most of the soybean production is crushed with two main products; soy oil and soybean meal. Soy oil and soybean meal (also commodities that are traded on the CBOT) are the main drivers for soybean prices. Soybeans supply more of the world’s vegetable oil than any other crop (the other major crops being palm, canola, peanuts and cottonseed). However, soybeans are a relatively low oil yielder, (about 20% oil; 80% meal.) Generally soybeans are crushed for meal, which is a major (and excellent) protein source for livestock feeds. However, during periods of high oil demand, soybeans are crushed for the oil, which may leave a surplus of soybean meal.

Currently the demand for soybean meal is declining. The apparent decline is likely associated with increased feeding of distillers dried grain, which is a byproduct of ethanol production. This substitution will likely continue as ethanol production expands. Declining domestic meal demand along with increasing soybean oil demand for bio-diesel may eventually result in the soybean prices being driven by oil demand rather than meal demand. As a result, soybean meal prices will remain relatively low. If bio-diesel production continues to expand, however, production may shift away from soybeans to crops with a higher oil yield.

Major factors affecting price include:

• Cattle, hog and poultry numbers;
• Weather in major vegetable oil producing regions, particularly South America;
• Trade conditions, e.g. willingness of EU to accept GM soybeans, oil and meal;
• Political conditions;
• Dollar exchange rates;
• Supply of competing products, including canola and palm oil;
• Overall economic conditions; and
• Consumer trends.

Closing Comments

Overall, it is important to understand that soybeans are a major commodity whose price is set in the U.S. Given its importance in the U.S. farm economy, U.S. farm policy is a significant determinant of supplies and, in turn, price.

Markets can be volatile. Also be accurate and realistic in calculating costs and risks of storing soybeans. There is no substitute for using accurate information, sourcing good advice, and making good judgments.

Finally, it is very important to have a well-developed network of fellow producers, and other sources that have an interest in your success. This network is invaluable in lending inside knowledge and expertise in the development of a successful marketing strategy.

Stay current, learn as much as possible about the marketing environment locally, nationally and internationally. Know about the marketing options and the associated risks and profit potential.

Consider all the options and associated risks as you decide when to sell. Your ability to manage these risks will influence how quickly you choose to sell.