Lessons from the High Soybean Prices of 2012 and 2022

Strong Prices Correlation between 2010-2012 and 2020-2022

Prices in 2020-2022 have followed a very similar trend to prices in 2010-2012, and although the correlation is due to different reasons, there is one key similarity, production in both 2011/12 and in 2021/22 was way below initial expectations. In 2012 production plummeted due to drought over soybean areas in the US and Brazil. In 2022, the Brazilian crop fell from initial estimates of 144 million mt to only 127 million mt. Prices in 2022 were further aided by demand for the commodity as the global economy begins to re-open and the lockdowns due to the pandemic are lifted. Adding to the upward pressure is unprecedented inflation in the US, a war in Eastern Europe, and higher crude oil prices.

High Prices in 2022 as Strong Demand Outstrips the Third Largest Crop on Record

World soybean consumption is estimated at 364 million mt for 2021/22 in the March USDA report. Strong demand is coming from the edible oil industry and the use of soybean meal in the animal feed industry. This global demand estimate is lower than initial estimates at the end of 2021, which were as high as 377 million mt, but still marks the 12th year in a row that global consumption has increased.

World production is estimated at 354 million mt for 2021/22, 12 million mt lower than last year's all-time record. The US had a record crop of 121 million mt in 2021/22, but Brazil’s 2021/22 crop is now estimated at 127 million mt. Brazil’s current crop estimate is much lower than the initial estimates of 144 million mt. This has kept prices near record levels and also indicates that global production would have to increase significantly in the coming crop years to keep up with consumption.

Market Situation in 2022 an Early Warning of Long Term Production Deficits

Soybean consumption has increased at an average of 4.3% per year over the last ten years. This is a much higher rate than the 10-year average annual increase in maize (3.6%), rice (1.1%), and wheat (1.3%). World soybean production has increased at an average of 4.8% per year over the last ten years, but this number is skewed by the global crop failure in 2011/12. The 11-year average increase is only 3.1%, and the 9-year average increase 3.5%, which are better indicators of the situation in this case.

What it comes down to is that world consumption of soybeans has increased at a faster rate than production over the last decade. To keep up with consumption in the near future, soybean production will need to expand at an increasing rate. Global yields have been increasing as soybean genetics and precision farming practices improve, but relying purely on yields to increase global production in line with soaring consumption is risky. A significant increase in the area under soybeans would be needed. However, looking at the way the industry reacted in 2012 indicates that there are limited possibilities for a significant increase in soybean areas.

The Reaction in 2011/12 Showed Limited Land Area Available for Soybean Expansion

Global soybean production dropped by 9%, from 264 million mt in 2010/11 to 240 million mt in 2011/12. In the US, things went from bad to worse when production dropped from 91 million mt in 2010/11 to 84 million mt in 2011/12 and then again to 83 million mt in 2012/13. As a result, prices climbed to a record in September 2012. Prices remained high until the latter half of 2014 after record soybean yields for two years in a row rebalanced production and consumption. Most notable however is that soybean areas did not expand significantly. Only 3% more were planted in 2012/13 and 1% less in 2013/14.

The reaction in Brazil was considerably different from that in the US. Record global prices in 2011/2012 triggered a soybean boom in Brazil. After Brazil’s production dropped from 75 million mt in 2010/11 to 67 million mt in 2011/12, it rebounded to an incredible 82 million mt in 2012/13. Brazil’s soybean production areas were expanding before 2012, but expanded at an increasing rate after 2012. The area under soybeans has more than doubled in the last ten years and is by far the largest increase globally.

Few other countries were able to expand soybean areas quite like Brazil even with high prices and soybean production being extremely profitable. This indicates that land areas suited to soybean production were already scarce ten years ago.

Can Future Production Match Consumption?

If significant increases in soybean areas were not possible after 2011/12, it will most likely also not be possible in the near future, Brazil being the obvious exception. At most, there could be a switch from other summer crops to soybeans. In the US, this switch could be significant enough in the coming season to greatly increase global production, but this would be a temporary solution given the competition for land from other crops. There is also a very real weather risk to the coming US summer crop season, as soil moisture is low and dry conditions continue with less than two months to go before planting starts.

Brazil remains the most obvious prospect for where this increase could happen. However, it is not without its complexities. There has been a push-back by environmentalist groups against the expansion of agriculture in Brazil’s rainforests, which is where most of the increased areas under soybean will come from. According to The Guardian, in Mato Grosso alone, 1,000 square km of rainforest has been cleared over the last ten years to make way for soybean production. Nevertheless, an expansion in Brazil remains the most likely short-term solution to balance world production to consumption, but is not necessarily sustainable over the long term.