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Nicole Thomas, Commodity Analyst for McKeany-Flavell

Soybean and sugar boom in response to dollar strength

“We’re dealing with a global glut of soybeans compared to what we’ve seen in years past,” states Nicole Thomas (pictured), Commodity Analyst for McKeany-Flavell. “In the US last year we saw phenomenal yields; we’re sitting at 385m bushels.”

From a global standpoint, stock levels are expected to be high with estimates of 25 metric tonnes of additional stocks. This is a result of strong production not just in the US but, more importantly, in South America; in particular Brazil, which now exports more soybeans than its bigger neighbour. 

“In the US this year we will likely see some significant acreage. I think it’ll be closer to 86m acres because if you look at the balance sheet and the potential impact of a crop that large, even with more normal yields of 45 bushels per acre in the US, you’re looking at close to 500m bushels, from a demand perspective that’s just too much,” comments Thomas. 

Looking at the figures, the US stocks-to-usage ratio is currently 10.4 per cent; that’s high but still some way off the 17.5 per cent ratio in 2006/7, when soybean prices crashed to USD5.50 per bushel. Currently, they are trading at USD9.83, down from USD10.60 per bushel in early January.

This is being further fuelled by a strengthening US dollar, which has gained 7.7 per cent on the Brazilian real, prompting Brazilian farmers to export their crops and lock in profits. 

“That is supportive of additional exports and is maintaining the strength of production we’ve seen this year. Soybean yields aren’t as high per acre as corn but as far as a cash crop is concerned it’s there in the best of times and the worst of times. It’s part of the reason why prices are depressed right now and I suspect US farmers will be looking at the situation and use the opportunity to plant corn instead. 

“The key takeaway for soybeans this year is one of ample supplies and weak prices,” clarifies Thomas. 

With respect to sugar, the Sugar No.11 contract has fallen substantially, with Thomas also attributing much of this move to the Brazilian real where the cost of production is estimated to be between 17 and 18 cents per pound. 

“For prices to be this low, for an extended period of time, is a rare feat. If you were to place the Brazilian real on a chart against Sugar No.11 they correlate highly. The London White or US No.16 markets are, to a degree, following what is happening with the Sugar No.11 contract so there is some causal relationship,” notes Thomas.

Since 2011, the Sugar No.11 contract has been in free fall. Prices have dropped from 32 cents per pound to 12.62 on the ICE futures exchange: their lowest in six years. 

“A lot of what was driving demand for sugar was biofuels. There was a concern as to whether we could balance out supply and demand for these products, both from a food standpoint and a biofuel standpoint. However, there is now a broader energy mix, there’s been more investment in technologies outside of petroleum-based products such that we can handle demand for sugar,” says Thomas.

It is not unconceivable that sugar is entering a new structural paradigm, where the cost of production is 16 cents per pound on the low end and 20 cents per pound on the higher end, concludes Thomas

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