My farmdoc colleagues Joana Colussi, Gary Schnitkey, Joe Janzen, and Nick Paulson just published an excellent new article on the U.S., Brazil, and China soybean trade “triangle.” The article is well worth your time to read. Here is the link: https://farmdocdaily.illinois.edu/2024/02/the-united-states-brazil-and-china-soybean-triangle-a-20-year-analysis.html. The article contains two excellent charts that summarize the diverging paths of the U.S. and Brazil in the global soybean market. I reprint one of them here for your reference:
My colleagues make an important point in the article about the tradeoffs the U.S. and Brazil face in their soybean sectors. Brazil is booming but basically has only one big customer—China. The U.S. has a smaller but more diversified demand base and may be more resilient to global demand shocks as a result.
I agree with my colleagues and heartily recommend reading the article. However, the article does not answer why the U.S. and Brazil have made such different choices for such big crop sectors. My explanation is that the US crop sector is in the process of re-insulating itself from world markets. We did it with farm bill programs through supply control from the 1930s through the 1990s. The 1995 Freedom to Farm programs largely ended the direct supply interventions. Apparently, US crop farmers prefer insulated domestic markets. But this time we are re-insulating through the demand side rather than the supply side. It started with the Renewable Fuel Standard (RFS) in 2005 and 2007, accelerated with the renewable diesel boom, which has priced the US out of the global soybean oil market, and new low carbon fuel incentives will be the next step in the decoupling. The one negative demand side policy in this period was Trump’s trade war with China, but I think it was another important data point in the movement toward insulating the domestic U.S. crop sector from the world market.
My point is not that the U.S. is going to 100% leave global crop markets. That is obviously never going to happen. But if you step back and take a big-picture look at what is happening, this is the strategic direction of the U.S. crop sector. We are once again becoming domestic market focused due mainly to biofuel policy. Funny how the more things change the more they don’t change.
Laurence J. Norton Chair of Agricultural Marketing
University of Illinois at Urbana-Champaign
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Dear Scott,
One potential consequence of the US re-insulating itself from the world markets is the role and quality of CBOT prices as viable hedges for non US users. The more the US futures prices reflect domestic prices Vs international values, the quality of the hedge erodes for international commercial players. The SBO futures market is a good example. The world may need alternative futures markets.
I agree that this could become a problem. However, a counter example is CBOT wheat. While its price discovery role has been diminished it is still the most widely used wheat futures in the world because it is the most liquid. As long as the liquidity stays it will be hard to displace a futures market. Having said that, soybean oil is a much smaller market. Certainly will be interesting to watch how all this unfolds.