A commodity model under strain
BY: Owen Wagner, Vice President, Grains and Oilseeds Analysis, Rabobank North America
Editor’s note: This article was written on Jan. 10, 2025.
It wasn’t that long ago that commodity markets had the world on a string. Propped up by the four-legged stool of:
- Strong fundamentals
- A positive macroeconomic backdrop
- Supportive policy
- The enthusiasm of managed money
This saw prices for corn, wheat, canola and soybeans roll into the summer of 2022 at or near record highs.
Fast forward to today and these former elements of support have morphed into the four horsemen of falling prices. The first shoe to drop in the unravelling of commodity prices was the United States Federal Reserve’s interest rate increase in May 2022. With higher borrowing costs, businesses and consumers started to take a harder look at spending, particularly on purchases deemed discretionary. While there’s some latitude at the margins, food is generally not a discretionary expense. That said, the growing share of grain used in biofuels has created an inextricable link with petroleum markets, which are discretionary. After all, when times are lean, consumers generally can’t cut calories to balance their budgets, but they can choose to drive less, ultimately making agricultural commodities more vulnerable to macroeconomic headwinds.
In the 30 months since, other elements of support have fallen by the wayside. Going into 2025, soybean prices stood at their lowest levels since the height of the U.S.-China trade war of the first Trump administration. Surveying the price landscape for the year ahead, it’s difficult to identify factors that could usher in a swift recovery, but it’s easy to identify factors that represent further downside risk. Sticking with the macroeconomic story line, interest rate cuts in the U.S., all other things equal, should help stoke demand for commodities. In practice, however, instability in the world and a resurgence of protectionism and populism appear to be exerting a stronger and more bearish influence.
The Canadian dollar, of course, has been under pressure from U.S. President Donald Trump’s chatter of tariffs within the Canada-United States-Mexico Agreement (CUSMA) as well as economic weakness at home. While devaluation would otherwise help keep Canadian products competitive in export markets, it will also raise input prices, exerting upward pressure on 2025 production costs. Although the performance of the loonie against the greenback may ultimately be a wash for Canadian farmers, the elephant in the room remains Brazil, the leading soybean exporter, which has seen its own currency fall 22 per cent against the U.S. dollar and 15 per cent against the Canadian dollar over the past year as foreign capital flees the country – increasingly put off by Brazil’s deficit spending.
A weakening Brazilian real is bearish for commodity markets but provides a convenient segue into 2025 fundamentals. Following the return of Argentina to the marketplace and a record U.S. soybean crop in 2024, the world enters 2025 with the largest soybean stocks and second largest soybean stocks-to-use ratio on record. With a massive (170 million metric tonnes) Brazilian crop on deck, fundamentals are expected to further deteriorate as the year unfolds.
A host of policies will impact soybean markets in 2025. Our “known knowns” include biofuel policies in the U.S. that have become generally less supportive. Growth in the volume obligation under the federal Renewable Fuel Standard has stalled, while a 20 per cent cap on vegetable oil in California’s Low Carbon Fuel Standard puts a severe constraint to future growth under that program. Meanwhile, Trump’s appointee to lead the U.S. Environmental Protection Agency, Lee Zeldin, took a skeptical view towards biofuels as a congressman, and time will tell if his stance becomes more sympathetic. Finally, no discussion of policy is complete without a mention of the prospect of a U.S.-China Trade War 2.0. Demonstrably, the first trade war precipitated a loss in market share for U.S. soybean exports. A second trade war is likely to do the same – creating some opportunity for Canadian exports but with Brazil being the primary beneficiary.
In closing, 2025 may usher in new lows for soybean prices in the current cycle. Indeed, with soy/canola price ratios at their lowest levels since 2012, markets appear to be telling growers to pump the brakes on commodity soy. While the environment will continue to be challenging, Canadian growers possess a few unique advantages that should contribute to their resiliency going forward. First, as one of the last regions in the Northern Hemisphere to plant a crop, Canadian growers can bide their time, evaluate the market and adjust planting decisions accordingly. Second, Canadian agriculture does a superior job in diversifying and differentiating their production. Case in point – 25 per cent of Canadian soybeans are for direct consumption, compared with two per cent in the U.S. In the year ahead, Canadian growers may be best served by keeping one eye on the behemoths to the south hammering away at the commodity model, while using the other to spot premiums in niche markets and opportunities for value add.