Executive Insights

Dark Clouds Forming

Kirk Leeds, ISA Chief Executive Officer, kleeds@iasoybeans.com

I’m generally an optimist when it comes to the future of the soybean industry in Iowa and in the United States. But several trends are testing my positive nature.

Global demand for protein continues to increase as incomes rise. When they are able, increasing numbers of consumers around the world want to eat more red meat, poultry and fish. Soy remains the preferred protein source in commercial feed for all three, so demand for soybean meal will continue to grow. Domestic (and global) demand for soybean oil as a feedstock for biodiesel, renewable diesel and potentially sustainable aviation fuel (SAF) also has the potential to dramatically increase the demand for vegetable oil on the oil side of the soybean complex.

With increased demand for both soybean meal and soybean oil, why would you not be optimistic about the future?

Amid this good news, I see potential dark clouds on the horizon. They include:

• Demand for biofuels partially exists because of government incentives and programs. When your future is determined by the government in the good times, it will also be impacted when government policies change and incentives are reduced. The Environmental Protection Agency’s (EPA) decision this past year to cap the Renewable Volume Obligations (RVOs) by design or default put a cap on the demand for biomass fuels for the next couple of years. Most biodiesel plants in Iowa are losing money or are barely covering their operating costs.

• In a normal year, U.S. soybean crush capacity increases around 2-3% as plants upgrade or expand. Due to expectations for huge demand growth in soybean oil use in biofuels, anticipated growth is closer to 25% over the next two to three years. What happens when the expansion crush capacity expands faster than demand? Soybean crush margins fall, and farmers face lower soybean prices.

• The world is a mess, with wars in the Ukraine and Gaza. Trade routes through the Red Sea are being threatened by terrorists. The relationship between China and the United States has not been this strained since China opened to the West in the 1980s. The future of Taiwan as an independent country is in question if China uses force to unite the island with the mainland. Will the U.S. live up to its commitments to support Taiwan, and if so, will we see armed conflict between the U.S. and China? All these challenges and more increase the instability in the global marketplace. The U.S. exports more than 50% of the annual soybean crop, so global chaos is never a good thing.

• While we will see increased crush capacity in the U.S. with the resulting increase in soymeal production, the Chinese government has decreed its feed industry should reduce inclusion rates of soybean meal in feed rations from 14.5% to 12% to trim its dependence on imported soybeans. Recall that China is the top market for soybeans in the world.

• In late January, I accompanied several ISA farmer directors on a visit to the “new” soybean growth regions of NE Brazil. The increased competition from Brazilian farmers will not slow down anytime soon.

• While inflationary pressures have slowed to something less than 5%, the 30-plus percent increase we saw over the last few years are not being reversed. We are “only” expected to add 5% on top of the previous increases. The result is that increased input costs for farmers are not going away anytime soon so profit margins are going to remain small to non-existent.

• All these clouds get darker due to the opposition by leaders in both political parties (and many Americans) to pursue any meaningful efforts to reduce trade barriers or secure new trade agreements. Without opportunities to gain access to customers around the world, we’ll see additional negative pressure on soybean prices.

What do these clouds mean for ISA and the farmers we serve? They remind us that there’s always more work to do to increase demand, lower costs of production, improve environmental performance, fight for great access to global markets and to advocate for government policies and programs that give our farmers a better chance to be successful.