The Problem with the Pacific Northwest

Farmers in the northern Plains and upper Midwest find themselves in a bind. What to do with a bean crop when there is no market? While the loss of China as an export market for soybeans is impacting all U.S. farmers, it is especially problematic for farmers in North Dakota, South Dakota and Minnesota, given they are heavily reliant on that market for exports. 

There is no significant crushing capacity to absorb the surpluses and access to southern markets or the Gulf by rail is too costly. The growth in soybean production in this tri-state region was predicated on demand from China, and feeding that pipeline through export markets out of the Pacific Northwest export market—the PNW. There is no fallback strategy. 

Consider some of the key statistics:

  • Last year, the PNW market exported 490 million bushels of soybeans with 453 million bushels going to China. Half of that was exported in a 2.5-month window between Oct. 1 and Dec. 15. That window of time has nearly passed, which means there is little hope to get those exports back before South American harvest kicks in this February.

  • This year, exports since Oct. 1 are not performing well overall, but the woes are especially noticeable in the PNW market, where exports are off 122 MB from the three-year average – a shortfall of 77%. By comparison, flows through the Gulf are only off 32%. Extrapolating out for the rest of the year would suggest 378 MB of soybeans won’t get exported this year through the PNW as compared to last year.
  • Putting a 378 MB PNW export shortfall in context, the entire crop for North Dakota is 247 MB. Those beans will have a big challenge finding a new home. The prospect of railing beans from North Dakota to the Gulf (where there is demand from Europe and Africa) is extremely costly, at about a $1.80 per bushel. With the Gulf basis at +25F, that still implies a much lower basis in North Dakota than what is currently trading, in the $1.30 to $1.60 range.

  • Basis levels in the northern Plains are running 30 to 50 cents worse than the same time last year. Other parts of the country had some worries about basis in the late summer and early fall but have managed to climb out of the troughs and are actually fairing pretty well as compared to last year in terms of basis levels. Other outliers include Indiana and Ohio, which are seeing much weaker basis thanks to astronomical yields.

soybean basis change

What's the key takeaway?

As Midwest markets start to rally, this may help beans move out of the Northern Plains. This surplus of beans in the upper Midwest will serve as a buffer for basis rallies farther South. So although basis levels in the Midwest have been rallying strongly out of harvest, don’t expect them to get carried away. For the PNW-sensitive farmers, the best option is a China trade resolution.

There will still be some export movement out of the PNW to other Asian countries, such as Japan, South Korea, Indonesia, Taiwan, Thailand and Vietnam. The PNW has a significant freight advantage for reaching those countries versus the Gulf. What is also interesting is these countries combined for 2018 have bought 134 million bushels, which is up only marginally from last year’s tally at this time of 126 MB. But, for the entire marketing year last year they bought 353 MB. With U.S. prices a solid $1 a bushel lower than last year, and South America priced out, you would expect these countries to start buying... which could provide a lift to the PNW market.


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