Concern overblown | Analysts says 25 percent drop is ‘hard to swallow’ and predict continued strong exports
Concerns are overblown about wilting Chinese soybean demand putting further downward pressure on the oilseed complex, says an analyst.
An official from the China National Grain and Oils Information Center is forecasting plummeting demand from a country that accounted for 63 percent of world soybean trade in 2013-14.
“This year, imports from the U.S. could fall by one-fourth because of large soy stocks and poor margins,” said the unnamed analyst in a recent Reuters story.
That would be a disaster, considering the United States is set to harvest a record 107 million tonnes of the crop, up 19 percent from last year.
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Arlan Suderman, senior market analyst with Water Street Advisory, isn’t buying the report out of China.
“I’m bearish soybeans, but I’m bullish demand,” he said.
“Falling by 25 percent is pretty hard to swallow.”
The Reuters story said Chinese soybean processors have been confronted by negative crush margins since February. They are losing C$72 for every tonne of soybeans they crush.
Suderman doesn’t pay much attention to crush margins.
“I don’t know how many times over the last five to 10 years we’ve heard how soybean demand is going to crumble because (China’s) crush margins are bad and then (China) just keeps on taking soybeans.”
He believes the health of the Chinese economy is a better barometer of demand.
“Its economy is slowing and that is a warning sign, but as long as (China’s) economy is growing at a strong enough clip to provide income for people, they want meat in their diet.”
Soybeans are crushed mainly for the meal to feed to livestock.
China’s economy is growing at about seven percent, shy of the 7.5 percent target.
That rate of growth is still the envy of most developed economies and more than enough to sustain strong demand for meat and the soybean meal fed to livestock.
“I certainly do not expect the big pull-back that many are talking about,” said Suderman.
Chinese crush margins are suffering because government support programs have artificially propped up domestic soybean prices to $19 to $20 per bushel.
However, processing plants have hedging programs to protect against high commodity prices, and even when margins are slim, history has shown demand may temporarily drop but only by five to 10 percent.
Suderman believes the market will be pleasantly surprised by the strength of soybean demand in 2014-15, but he also realizes that supply is going to overwhelm demand, which is bearish for soybean and other oilseed prices.
“It’s probably going to require a significant weather problem in South America to give us any kind of decent rebound in prices over the coming nine months,” he said.
