Here’s a thought experiment: Let’s pretend that human consumption of all soy products and bulk field corn dropped to zero in the coming marketing year, and that everyone knew this was going to occur. What would happen? Well, the prices of these commodities would probably drop back towards where they were circa 2000, an era when demand couldn’t keep up with rapidly improving yields and the entire concept of a grain shortage seemed like a quaint anachronism. The lower prices would presumably in turn reduce corn and soy planting to circa 2000 levels, which is about 10% less than where they are today. But even with virtually no human consumption of corn or soy, at least 90% of this land would still be used for a corn/soy rotation. The best farmland in the Corn Belt would barely see any change at all.
What this reveals is that the relationship between our eating habits and what gets planted on most of America’s farms is a lot less direct than we might imagine. Even with the local food movement taking root widely, industrial agriculture in this country holds its ground, because consumer choices influence only a marginal piece of this highly efficient operation. The ruthlessness with which businesses look to exploit an unused resource can be truly breathtaking. Name a by-product of virtually any agricultural operation, and someone will find a use for it. Heck, there is an active business in feeding chicken litter to cattle. Got something you don’t want to truck down to the landfill? What’s the caloric value of that stuff? Is it a decent source of protein? Maybe someone will take it off your hands.
Soy crushers make the majority of their profit from the meal, not the oil, of the bean. But in the 1920’s, when the industry figured out how to hydrogenate soy oil and turn it into margarine, what was ostensibly waste became gold. Not long after that, soy oil became our major source of salad oil, and it also expanded into the baking and frying industries. There was a time not that long ago when it seemed just about any food you bought, be it in the supermarket or at a restaurant, contained at least a little soy oil.
Then came the revelation that the hydrogenated transfats which had become a backbone of the U.S. frying and baking industries were not very good for you, even when consumed at relatively low levels. The role of transfat as a contributory factor in heart disease, and possibly other ailments, has been well documented and widely publicized, and demand for this major use of soybean oil has—for good reason—fallen on hard times.
Here are a few of the particulars: Back in 2003, the U.S. baking and frying industries consumed 8.289 billion pounds of soy oil. In 2010 (the latest complete year that the U.S. Census Bureau provided this data), baking/frying consumption had fallen by more than half to 3.610 billion pounds, and the precipitous fall has presumably continued since. Soy oil used for margarine also declined by 28 percent between 2003 and 2009. Initially, salad oil producers took up much of the slack, using 10.321 billion pounds in 2008, up 23 percent from 2003. But even this total has been falling in recent years, dropping to 9.207 billion pounds in 2010, and the available data from the National Oilseed Processors Association (an umbrella organization of crushing firms that provides the only relatively comprehensive crushing data around now that the Census Bureau has terminated its crush report) indicates that this number has also continued to decline.
Meanwhile, canola imports into the U.S. totaled a record-large 3.125 billion pounds in 2010/11, and the imports so far in 2011/12, at 552 million pounds, are a fresh record for the first two months in the marketing year. It seems that major U.S. food producers are now in active pursuit of what are at least perceived to be healthier types of fat. In other words, if you are a big food maker, having a cheap, dependable raw material at your disposal may be nice, but it pales to the concern that you may not be able to sell your product if the public no longer considers that raw material to be safe.
But don’t shed a tear for the American soybean crusher, because where there is an abundant resource, demand is sure to follow. In this case, the new demand takes the form of the U.S. government’s mandate for renewable fuel. The USDA projects that about 3.6 billion pounds of soy oil will be used by the U.S. biodiesel industry in 2011/12, or about 19 percent of all U.S. soy oil supplies. Biodiesel mandates totaled 800 million gallons in 2011 and will total 1 billion gallons in 2012, but have not been yet determined for future years. However, what we do know is that the law currently mandates that 5 billion gallons of “undifferentiated advanced biofuel” be produced by 2022, and currently the only commercially viable option in this category is biodiesel. Assuming soy oil makes up a similar percentage of the source material for biodiesel production as it does today, this means that virtually all the soy oil currently produced by the U.S. crushing industry would have to go to the biodiesel industry to meet this “advanced biofuel” mandate.
This is, in microcosm, why the corn/soybean monoculture that has dominated the landscape of the American Midwest for decades is so difficult to break. This was confirmed in USDA’s annual prospective plantings report, released on Friday, which projected 2012 U.S. corn seeding at 96.4 million acres, the highest level since 1937. U.S. soybean planting was increased in the report from USDA’s March estimate, up to 76.1 million acres, making combined corn and soy planting in 2012 a new record high.
On those occasions when the demand for a product dries up, such as we are witnessing with hydrogenated soybean oil, there is almost guaranteed to be a new buyer for the relatively cheap, abundant supply of whatever product this land can most efficiently produce, even in the case, such as today, where much of that new demand is driven by the government.
Even after major food makers have switched from soy to alternative oils, such as sunseed and canola, the crops planted to produce those make up 1.8 and 1.6 million acres, respectively—each about 2 percent of the farmland devoted to soybeans. Consumer habits do not alter the soil and climate patterns that make one crop work better than another, and the history of crop production in this country demonstrates that supply will eventually drive demand.
James Barnett is the commodities analyst for “A Contrarian’s Dilemma,” a futures market letter. He has worked in the commodity futures industry for the past 14 years, initially as a grain market reporter for Bridge News, and for the past decade as a grain analyst, including the research departments of Refco and MF Global, which at the time were two of the pre-eminent U.S. futures brokerage houses. He has presented long-term price analyses at industry conferences across the U.S., Canada, Brazil and China.