With soybeans passing $14.75 per bushel at many Minnesota country elevators, the ubiquitous oilseed is making world headlines. “Fears for return of global food inflation as soybean prices soar,” was the front-page headline in the Financial Times on April 30.
This is good news for many, but not all, Minnesota farmers. It is negative for consumers, even though the impact on most households will be minor compared with, say, gas prices. But why are prices rising dramatically, some 10 percent in the last month? And how will this affect the overall economy here and elsewhere?
Professors who teach introductory econ love soybeans because they are perfect real-life examples of many economic principles. Beans are an example of the “homogeneous commodity” that you need to have for perfect competition to exist. They have substitutes, not only in consumption but also in production. Yet they simultaneously complement corn, the primary alternative crop.
Soybeans are produced in all hemispheres and are internationally traded. There are derivative securities – futures and options – based on soybeans. The enormous expansion of their production in the last half century is an example of induced technological innovation. The list could go on. So let’s see what this all means in the real world.
The short explanation of why bean prices are increasing is that there are a lot of people who want to buy them, but it appears that production over the next year will be less than anticipated.
A reduction in anticipated supply interacts with steady demand to drive prices up, not only for farmers actually hauling wagons of beans to the elevator today, but also in futures markets.
The primary reason that fewer beans will be offered for sale is that the weather in growing areas of South America – Brazil, Uruguay, Paraguay and Argentina – has been bad and yields thus far in the harvest are even worse than expected. The bad weather stems from the climatic phenomenon called La Nina.
Since it is in the opposite hemisphere, South American production is off-cycle about a half-year with production in the U.S. and other Northern Hemisphere countries. Minnesota farmers soon will start planting beans as the harvest peaks in South America.
It is hard to think of a plant used for more diverse purposes than the soybean. Whole soybeans are used in tofu and all sorts of other traditional or synthetic food products. Soybean oil is used by itself or as an ingredient in other foods. Oil also has industrial uses, including plastics. The meal is an important protein source for virtually all livestock.
So higher bean prices mean at least somewhat higher costs for cooking oil, margarine, baked goods and myriad other foods. They eventually drive up the cost of producing chicken, pork and beef.
Higher soy prices automatically pull up prices for other oil sources, including corn (for corn oil), sunflowers, canola (formerly called rapeseed), safflowers, peanuts and flax. So even farmers in areas where beans don’t grow well will see higher prices for some crops they do plant. And users of these other oils or meals also will pay more, even if they don’t customarily use soy as a raw material. All that matters is that there be some degree of substitutability between soy-based products and the other good.
Higher soy prices also motivate higher production. But crop production is seasonal, and there are only a few weeks for most farmers to change their minds. Moreover, planting more of one crop inherently means planting fewer acres of alternative crops.
Corn and soybeans are very good substitutes in production since they use many of the same inputs.
After weather, the second factor driving up soy prices is that a recent survey of U.S. farmers’ planting intentions showed they were going to plant somewhat more corn and somewhat fewer beans than previously thought. That new information marginally drove up bean prices and marginally drove down corn prices.
That change in relative prices may cause some farmers to revisit their decision. Economic theory says they should move away from corn and back to beans. At the margin, some will. This may result in tens of thousands of acres more beans and less corn than they planned only weeks ago. But, given how late this is, with seed already bought and much fertilizer already applied, such a counter-shift will be small relative to total soybean or corn production.
This decision is complicated by a simultaneous substitute-and-complement relationship nearly unique to soy and corn. Corn is a nitrogen-hungry plant. Soybeans are legumes and fix nitrogen from the atmosphere and leave it in the soil. Harvest a field of soybeans and it leaves behind tons of nitrogen that will reduce fertilizer costs if corn is grown in the same field the next season.
Environmentalists decry the corn-soy biculture that has come to dominate much of U.S. agriculture. They have some good reasons. But agronomically, a corn-soy rotation is very efficient. A farmer can skew an established rotation in response to higher relative prices for beans. But you then sacrifice some of the unique symbiotic gains from alternating beans and corn.
Much more could be said about the complex economics of soybeans, especially in international trade.
But that is another column.