South America is an example
OPEC can learn this lesson from soy farmers
History shows that giving up market share through production cuts is a dangerous game. The oil-producing countries of the OPEC oil cartel could learn an important lesson from soybean producers, writes Business Insider.
According to investment site MarketWatch, there are some striking parallels between Brazil's emergence as a soybean export giant and the rising production of US shale oil producers.
Until the 70s, Brazil hardly played a role in the US-dominated global soybean export market. However, after a series of export embargoes on soybeans and grain (the first of which was introduced by President Richard Nixon in 1973), the situation changed completely.
A report from the US Department of Agriculture shows that the real damage to US farmers was not caused by the temporary fall in domestic prices, but by Japan's loss of confidence in the United States as a supplier.
Japan therefore decided to invest heavily in the Brazilian soybean industry. In 1971, the country produced only 76 million bushels of soybean, while the US produced 1,127 billion bushels. In 2016, Brazilian production was 3,546 billion compared to 3,926 billion in the US.
And while both countries' production and exports have grown, US market share in global soybean exports has declined. Brazil and Argentina now together control more than half of the soybean export market. Before 1980 this was less than 15 percent.
US shale oil
U.S. shale oil production has also grown rapidly. This was mainly due to the sharp rise in oil prices in the past decade. OPEC's efforts to regain market share from US shale players have turned the pumps wide and the oil price plunged from over $100 a barrel in 2014 to below $27 at the start of 2016.
Risk of production cut OPEC
OPEC's current efforts to support the oil price through production cuts could turn out to be wrong for the OPEC countries, just as it did for US soybean producers. Because US shale producers have improved their technology and efficiency, they can react much faster than expected and use any price increase to expand their market share.
Whether US shale producers will actually fill the gap from OPEC's production cuts remains to be seen. However, it does raise questions about how OPEC countries can regain the lost market share after stopping production cuts without disturbing the balance in the market again.
In any case, when it comes to the commodities market, history shows us that it is not so easy to regain market share once it has been handed over.
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