The Stockout: Cargill places its cash the place its beans are

Cargill’s announcement last week that it would make an investment of nearly half a billion dollars in soybeans caught my attention as it suggested that one of the world’s largest food producers believes soybeans are ready for sustainable growth and the recent rise in prices and the rise in production are not just the result of passing trends. I realize that growing food segments like soy-based dairy alternatives and vegetable meat alternatives, are viewed as sustainable megatrends by many large food and beverage companies and their investors. If you add huge demand from China and India in the short term, you have a soybean market that is off the charts.

For many CPG companies, this is related to the problem that will make or break for many in 2021: whether they can successfully pass on cost inflation (in ingredients, animal feed, fuel, packaging, transportation, etc.) with price increases.

Cargill’s investment underscores soybean production as a growth area. Last week, Cargill announced it would invest $ 475 million to improve its soy processing capabilities. The investment spans seven states and includes upgrading facilities, expanding shredding operations, accelerating loading and unloading times, increasing capacity and improving logistics. The investments are designed to increase the company’s soybean production capacity and provide customers with faster access to soybean-based ingredients. Cargill invests in both food and fuel (soy biodiesel) and to meet growing domestic and international demand.

Soybean prices are at their highest level since mid-2014

(Image: Markets Insider)

Soybean prices have increased largely due to overseas demand. Soybean prices are over US $ 14 / bushel, down from less than US $ 10 / bushel at the beginning of 2020 and their highest level since mid-2014. After the African swine fever debacle that decimated the Chinese pig population and the As the number of Chinese pigs decreased by about 40% in 2019, great efforts are still being made in China to replenish the pig population. In order to replenish the pig population, feed rations must be made that contain corn and soybean meal. As a result, China is expected to buy 104 million tons of soybeans this year, and total U.S. soybean exports are expected to grow 34% in the current crop year 2020-21 compared to crop year 2019-20, according to the USDA. This is due to a period of weak US soybean exports to China in 2019 / 1H20 related to the trade war. When China started buying US soybeans in bulk last year, soybean yields were below expectations, which drove up prices. Soybean stocks have been limited since then, starting the 2020-21 crop year 42% below the previous year’s level.

The resurgence of African swine fever in China is adding to uncertainty about the outlook for soybeans. There have been reports of this return where the sow has fallen 3 to 5% every month since September. The strong resurgence could cause soybean prices and US exports to fall as the Chinese feed a smaller pig population and soybean meal prices, which have fallen since late last year, could be a leading indicator of soybean prices.

However, there is no consensus on what impact African swine fever will have. At a recent investor conference, Archer-Daniels-Midland expressed doubts about a full return of African swine fever to the extent previously observed, citing improved sanitation on farms. The company also described the increased demand for grain from China as a “medium-term phenomenon” and believes that feed prices for soybeans and corn will continue to rise in the near future.

Soybeans ⸺ hectares planted / harvested ↑, stocks ↓, exports ↑

(USDA March WASDE report)

High soybean prices are affecting other US crops. US corn exports are expected to be 46% higher year over year. Soybeans are more profitable to farmers than corn, especially at recent prices, which has resulted in farmers increasing their soybean acreage by about 7 million acres, or 9%, year over year. Maize competes for the same acreage, which is why less acreage is available for maize production. The USDA expects corn to gain a slightly more modest 4% year-on-year in crop year 2020-21. It is also likely that soybean acreage will again expand significantly this summer. As a result, corn prices have also risen sharply, increasing nearly 50% in the past 12 months. Rising crop prices have also been seen in other crops like canola, and rising ingredient prices have led most CPG companies to say they expect cost increases in at least the low single digits, which I think may be underestimating how high their costs are can actually go up.

Canadian Class I Railways set new monthly records for grain wagon loads.

(Source: SONAR; Grain wagon loads sourced from Canadian Class I railways for 2021, 2020, 2019, and 2018 are shown above in blue, green, purple, and orange, respectively.)

Meanwhile, tight transportation markets have made it difficult for soybeans to get to market. Grain produced for export in the US and Canada is typically transported by rail or barge, but a significant portion (5% -7% of US soybean exports) is transported in international shipping containers that are returned to west coast ports. The recent tightness in the international container market has prompted the container shipping companies that own or lease the international containers to do so demand that these containers return quickly without being reloaded with grain On the backhaul routes, this has never been an important profit center for the shipping companies.

The number of empty international containers (mostly 40 feet) returning empty to the ports of LA and Long Beach has increased steadily over the past year.

(Source: SONAR; volume of 40-foot empty containers entering the LA region using a seven-day moving average)

Meanwhile, competition from Brazilian soybean exporters is increasing. The USDA estimates that Brazil exports corn and soybeans could hit record highs, which could put pressure on sea freight rates for bulk cargo. However, soybeans leaving Brazil have a natural disadvantage as shipments leaving Brazil take 45 days to reach ports in China, while shipments leaving the U.S. or Canadian Pacific coast are closer to two to three weeks .

Do you think rising ingredient prices will hurt CPG companies’ results? Let me know mbaudendistel@freightwaves.com.

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