Cooked Books and Soybeans: The Black Swan’s Warm Up Act

Cooking the Books Soybeans
Soybean prices have been moving up.  For many of us that has being a breath of fresh air.  On March 2nd May soybeans reached a low of $8.56 a bushel, but closed today at $9.10 a bushel. In fact Brazil is flush with soybeans, over 100 MMT worth so we know that can’t last forever.  Needless to say, spring is getting closer here in North America.  Some soybeans will be rolling into the ground next month here in Ontario.

A $.64 move in May soybeans is a monster shift compared to what has been happening since fall harvest.  Some of this is happening because soybean meal has done well especially with exports to parts of Southeast Asia.  Problems in Brazil continue to percolate with its government in turmoil.  I’ve really had a hard time understanding how this might affect the soybean economy.  Needless to say, over the past week the Brazilian Real has actually gained in value a few days based solely on the possibility of a change in government.  It seems to happen every year.  Record soybean crops in Brazil tend to bring on record congestion.  This year it’s correlated with government protests.  Soybean prices have benefited.

The Brazil situation I find extremely fascinating.  We are talking about our biggest competitor in the soybean market and their politics is in chaos.  Their economy is set to shrink in 2016 by 4%.  That is huge compared to Canada and the United States where we will grow 1 to 3% this year alone.  In fact, negative economic growth rates are rare and even in recessionary times are measured quarter per quarter.  With the Brazilian economy shrinking, at a certain point you would think that would affect their soybean economy.  I laughed this week when I read DTN’s South American correspondent Alastair Stewarts comments about the fiscal situation in Brazil.  He wrote, “While the government (Brazil) is in collapse amid scandal, the basis on which the president is being impeached rests squarely on fiscal improbity. The problem here is that everyone cooks the books.”   It was a colourful quote from Alastair, I wonder if those soybean statistics gets cooked too.

We’ll see if the price of soybean continues to rise because of the political unrest in Brazil.  Maybe the books are cooked a little bit more than usual.  However, when talking about “cooking the books”, we cannot ignore the new federal Liberal government budget that was released earlier this week.  In the budget, Finance Minister Morneau projected a $29.4 billion deficit for this year.  The Liberal government pledged $120 billion for infrastructure spending over 10 years and also plans to spend heavily on families and aboriginal peoples.  Our Canadian federal debt is expected to grow by $113 billion by 2020-21.  For some in farm country, the thought was the same as in Brazil, was Mr. Morneau cooking the books?

I don’t think so.  To me, it was a traditional Canadian budget, with lots of spending.  I honestly had the hope going into it that there would be some federal funding for agricultural risk management programs like the one we have in Ontario.  The Ontario government has always requested federal participation for their own risk management program for grains and oilseed farmers.  However, none was forthcoming.  I had asked earlier about this possibility at the Grain Farmers of Ontario annual meeting in London Ontario this past week.  I was told not to expect it and that is exactly what happened.

Maybe I’m old school, but that was disappointing to me.  Ten years ago next month is the anniversary of the Ottawa Farm Solidarity Rally on Parliament Hill.  On that day I took a lead role and ten years later, I’m disappointed there is still no good income stabilization policy for Canadian grains and oilseeds farmers.  In many ways, the ground has shifted underneath us.

I say that because I’ve been asked lately how Canadian farmers would react today if they were faced with the same “cash grain price optics” our American friends have.  When I mention the rallies 10 years ago, guys comment it won’t happen again, not with farmland being worth $20,000 an acres in some southern Ontario locales.  I concur; the whole world has changed, so much different than the pre-ethanol era.

Nevertheless, our world moves on.  The Canadian dollar saves us for now.  The Canadian cash price for soybeans has been tempered by a loonie on a tear since January 20th.  In fact, even with a 64 cent rise in soybean futures prices from March 2nd, the cash price is about the same as it was at a .68 cent dollar on January 20th   It’s a bit like a legal mirage, or a controlled “cooking the books.”

So as we look ahead, we’ll hope for some more bullish news for soybeans, even at a time, when it’s likely, we’re pushing our luck.  Of course don’t hold your breath for a Canadian agricultural safety net even at a time when our federal government is careening us into more debt.  As Canadian farmers, we’re on our own for a while.  That black swan is still out there.  64 cents in three weeks in soybeans might be its warm up act.