The market has been waiting for China to live up to its trade deal with the U.S.; analysts think it might be about to happen
Analysts are starting to believe China will live up to its Phase 1 trade deal commitments by buying copious amounts of American soybeans, which will help bolster the entire oilseed complex.
Bloomberg ran a story last week saying people “familiar with the matter” are forecasting China will buy a record 40 million tonnes of U.S. soybeans in calendar year 2020.
That would be 10 percent higher than the record set in 2016 and 25 percent more than the 2017 base year of the trade pact.
“I actually believe the story completely,” said Rich Nelson, chief strategist for Allendale Inc.
“It matches what we have internally.”
Nelson said there are already 26.6 million tonnes of old and new crop U.S. soybean sales to China and “unknown” destinations on the books this year.
About three-quarters of the time the unknown destination turns out to be China.
He thinks it is reasonable to expect another 14 million tonnes of sales to the country over the next few months, considering that is typically the high volume months for U.S. soybean exports.
A few months ago, Nelson was forecasting somewhere between 25 to 30 million tonnes of sales to China. But around mid-June, U.S. soybeans started to be far more price competitive with Brazilian soybeans.
Today they are about 60 cents per bushel cheaper and that is fueling the strong sales program.
He said the sudden strength in U.S. soybean exports and in global vegetable oil prices is helping prop up the entire oilseed complex, which has been performing surprisingly well.
The other market factor is the lack of rainfall in key U.S. soybean-growing areas.
“We are trimming yields with the current August dryness in the U.S.,” said Nelson.
Surging demand from China combined with the potential for contracting supplies in the U.S. has changed the market dynamics for the crop.
“We’re simply trimming the market’s perception that this was a wildly oversupplied market down to a more moderately supplied market,” he said.
Supplies won’t be tight by any means but they will be more comfortable than originally forecast.
Keith Ferley, commodity futures specialist with RBC Dominion Securities, said the November soybean futures contract closed at US$9.52 per bushel on Aug. 28, up from a monthly low of $8.64 on Aug. 10.
He agreed that dry conditions in key production states and strong buying interest from China has fueled the late-August price surge.
China seems keen on rebuilding its depleted vegetable oil stocks and living up to its Phase 1 commitments.
But Ferley worries about reports of a 133.5 million tonne Brazilian soybean crop on the horizon and what happens to the Phase 1 deal if Democratic candidate Joe Biden wins the U.S. election on Nov. 3.
“(China is) picking up the pace but once November hits, what’s going to happen then?” he said.
Nelson said the soybean rally is also tied to a hot vegetable oil market.
Concerns about COVID-19 labour constraints limiting the ability to harvest palm oil crops in Indonesia and Malaysia turned out to be overblown.
And vegetable oil demand in India and China has rebounded nicely from the COVID-lows.
India’s proposal to expand its biodiesel mandate to 40 percent from 30 percent is also boosting palm oil prospects, which in turn is pulling soy oil and canola prices along for the ride, said Nelson.
By the end of August, nearby canola futures prices had rallied 12 percent from their mid-March lows largely due to strong vegetable oil values.
“I do think that’s a significant factor,” said Nelson.