The soybean oversupply in China that lowered oilseed prices in March appears to be resolving itself, but it is worrisome that one country’s demand plays such a dominant role in the sector.
Even as demand rises, China’s soybean crops are getting smaller. The U.S. Department of Agriculture expects China’s soybean imports to climb to 72 million tonnes in 2014-15, or 64 percent of world trade.
On the one hand, China’s near-insatiable demand for soybeans has lifted the price of oilseeds, including canola, for many years. This year, China bought an additional six million tonnes from the U.S., contributing to the razor tight stocks. This has driven July soybean futures above $15 a bushel — not the highest price ever but the highest ever for May.
Read Also
Sask. ag group wants strychnine back
The Agricultural Producers Association of Saskatchewan has written to the federal government asking for emergency use of strychnine to control gophers
The downside is that 64 percent of world soybean trade takes place with one country, where government intervention in the market is a regular feature and where artificial economic anomalies interfere with normal market operations.
This year, Chinese crusher profit margins plummeted just as the South American soybean harvest was starting to get to port. Rumours spread that Chinese crushers would default on up to two million tonnes. Chicago soybean futures, which had been rising since late February, were knocked back for several weeks.
However, a blog on Chinese agriculture and rural issues called DimSums.blogspot.ca, quotes Chinese media reports saying defaults were minimal as cargoes from Brazil were redirected to American buyers.
China’s crush margins were falling because demand for soy meal was hurt by bird flu, which caused consumers to shun chicken and forced producers to cull flocks. Also, the pork business went through a difficult period for a few months.
Demand and crush margins are now improving. Bloomberg reports that strong demand and prices for eggs are sparking poultry expansions, and there are improvements in the hog market.
However, economic anomalies unrelated to agriculture or food also contributed to the problems in March. Companies could get 90- to 180-day letters of credit for soybean imports. Dim Sums reports that until the soybeans arrived, the importers could use their credit to make short term loans at high interest rates and pocket the profits.
That encouraged importers to order more soybeans than what was needed. There were also exchange rate factors that encouraged soybean imports.
Chinese crushers complain of an over-capacity in the domestic industry. Dim Sums said the surplus was at least partly the result of government becoming alarmed in 2008 by the amount of multinational ownership of the crushing industry by companies such as Singapore-based Wilmar International.
The government financed new state-owned plants to build up its control.
In 2012, the state-backed China National Grain & Oils Information Center reported that crushing capacity had reached 125 million tonnes, up 30 million in two years. The average rate of operation was less than 50 percent of capacity.
Overall, China’s soybean demand has been a good thing for Canada’s oilseed producers, and it will likely continue to buy more oilseeds in the future.
China might be able to keep up with rising corn, wheat and rice demand, but it has ceded its oilseed market to foreign suppliers.
However, as the Dim Sums report notes, Chinese government involvement and anomalies such as the credit situation present risks that no supply-demand analysis can foresee.
