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A look at changing IP soybean premiums

During the fall of 2008 and spring of 2009, premiums for the 2009 crop of identity preserved (IP) soybeans reached a high of $2 to $3 per bushel. This was up about $1 per bushel from the year before. The peak was brought about by a convergence of several factors, including some frantic short-term action in the commodities markets and some long-term efforts and trends.


November 30, 2009
By Carolyn King

During the fall of 2008 and spring of 2009, premiums for the 2009 crop of identity preserved (IP) soybeans reached a high of $2 to $3 per bushel. This was up about $1 per bushel from the year before. The peak was brought about by a convergence of several factors, including some frantic short-term action in the commodities markets and some long-term efforts and trends.

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Premiums for identity preserved soybeans reached a high last spring in part due to frenzied market activity.

 

The identity preserved process ensures the identity or purity of soybeans with certain characteristics that the buyer requires, like high protein or high sugar. The IP process provides documentation tracing the soybeans each step of the way from the seed grower through the soybean grower, the elevator and the shipping system. The key characteristic required by many IP buyers is that the beans be non-genetically modified (non-GMO). Producers who grow IP soybeans look for the premium because of the extra work and extra costs involved: keeping detailed records; using certified seed; thorough cleaning of planting, harvesting and storage equipment before use; and maintaining separate bins. As well, production of non-GMO soybeans usually incurs higher herbicide costs.

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Market madness and changing soybean sources
Market forces strongly influence IP premiums, and the premiums for the 2009 crop are no exception. Martin Harry, eastern marketing manager for SeCan, says world food demand and speculation drove the IP premiums up in late 2008 and early 2009. “The 2007 crop wasn’t good for IP, so there was a shortage of beans, and that pushed up the demand. Then commodity prices went through the roof and there was big scare. Why were beans $16 a bushel or $14 a bushel? Because of speculation. That caused panic that there was a shortage of beans and food around the world, and everybody went nuts.”

John Johnston, a long-time soybean grower and a member of the Ontario Soybean Growers board, says, “2008 was an exciting time in commodity agriculture. We had record prices on corn and beans, and the IP premiums rose up with them.”

Martin Vanderloo with Huron Commodities takes a closer look at the effect of those market fluctuations on premiums. “In 2007 we had a rather poor soybean crop; we had lower yields, almost 50 percent of what we were expecting, and poor quality. That was for most of Canada and a good part of the United States. So non-GMO and particularly IP soybean varieties were in very short supply.” As a result, trading companies, distributors and manufacturers all wanted to buy more soybeans than usual to avoid shortfalls in 2008 and 2009.

Then market speculation drove up soybean prices, and the high prices drove up the premiums. Vanderloo explains, “With soybeans at $15 and $16 a bushel, growers were saying, ‘Why would I bother with IP beans, going through all the work and the headaches, for a mere $1.50 or $2 per bushel premium? I can grow Roundup Ready beans and it’s simple and the yields are good, and I get $16.’ So we said to the buyers, ‘When soybeans are $8 a bushel and we pay the grower a $1 premium, percentage-wise that’s a good deal. But when soybeans are $16 a bushel, and you pay him a $1 premium, the grower’s going to say it’s not worth it.’ So that’s part of the reason why the premiums got higher.”

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Reasonable premiums for IP soybeans will be the answer to competition from increasing yields expected from advances in genetically modified soybeans.  

Johnston notes, “I think a second factor in the higher premiums was that the Asian buyers, in particular the Japanese, after visiting here many times, were starting to understand that it was going to take that kind of a premium to secure some acres. They could see the cost differential between growing genetically modified beans and food-grade non-GMO beans, the dollars and cents difference that growers had to have to justify that extra work and management.”

Another factor influencing premiums was the Canadian dollar.  Vanderloo explains, “The strength of the Canadian dollar has a very dramatic effect, not only on soybean basis, as we all know, but also on premiums. When we’re dealing with an 85-cent dollar, it’s much easier to pay the grower a reasonable premium than when we are bumping up against a 94-cent dollar.” For instance, at end of December 2008, the Canadian dollar was down around 80 to 82 cents.

An additional consideration for IP buyers is Chinese soybean production. “China has become less of a soybean exporter and more of an importer. In addition to that, Chinese consumables don’t have a good image in the rest of the world. The Chinese at one time had something like 35 to 40 percent of the Japanese food-grade market. That’s fallen to a very small percentage,” says Vanderloo. “And guess what?

Canada has picked up the slack for the most part.”

Vanderloo says the hard work of Canadian soybean breeders, growers, processors and exporters toward high quality food-grade non-GMO soybeans has helped to create a strong international reputation. He notes the IP market is crucial for Canadian soybeans: “We need to be more than a commodity soybean producer because frankly we’re not competitive in the world market on crusher soybeans. So we have to do something different. And I think we do a good job of that.”

Johnston comments that market awareness by the Canadian Soybean Council and exporters, along with some government funding for trade missions, have also helped attract international buyers to Canadian IP soybeans.
 
He adds, “I was on a mission in February of 2009, and in Japan it was made very clear to us that Japan did not want to buy as much food-grade beans from China as it had in the past because of a couple of food scare issues. That made the Japanese look elsewhere for a supply of beans. I think some of the other suppliers just weren’t able to find the acres. For instance, the Americans couldn’t find the acres because everyone there was going to genetically modified soybeans.”

Where are IP premiums headed?
As of September 2009, IP premiums are looking softer. “A lot of the 2009 crop was secured at very good premiums. But if a grower hasn’t signed a contract with a processor, I think they’ll be very shocked at how little the premium will be this fall. I think the buyers have already got a lot of beans booked, so nobody needs any beans right now,” explains Johnston.

Harry notes, “I just did a survey of all the brokers, and the premiums for 2010 will probably come back down. There are lots of acres of IP beans out there. There’s lots of inventory from last year still. Japan has full inventories right now. So premiums will probably soften back to that $2 range; we’ll lose that $1 we gained. That’s the feeling right now, but it’s not harvested yet.” 
Vanderloo says, “In our case and in most others I believe, we’ve sold a larger percentage of the 2009 crop by December of last year than we ever had before in the past. I think it comes back to that shortfall in 2007, and the paranoia that came from that. So here we are about to go into soybean harvest, and the Japanese warehouses and the inventory are at record levels of 2008 beans.”

However, Johnston, Harry and Vanderloo all agree that premiums could quickly change if an early frost or other problem affects soybean yields or quality this fall.

Vanderloo sees another possible consideration on the IP premium horizon. “Roundup Ready 2 soybean varieties are being pushed by industry players. If these varieties in fact turn out the way they are hoping, with substantially higher yields than the traditional varieties, that’s going to mean that we must continue to pay reasonable premiums, I won’t say they’ll be the same as they were a year ago, but reasonable premiums, for a grower to grow IP soybeans and non-GMO varieties.”

He concludes, “Whether it’s a premium or basis levels or the futures market itself, and whether it’s soybean or corn or wheat or hogs or cattle or gasoline, if it’s a commodity, we will always have peaks and valleys in a market. It’s dictated by supply and demand, and of course Mother Nature plays a very big role in what we do. I think, long-term, we’ve got a good product, so people shouldn’t be discouraged by what we see today. I’m confident that things will turn around and that once the buyers use up these inventories that they are kind of choking on today, they’ll be back.”