US soy exports to China seen as over-exuberant

 

 

Exuberant US soy shipments to China could collapse in the face of waning demand and strong supply and some buyers could cancel orders in the next few months.

 

According to traders on Tuesday (Jan 5), after China booked an unprecedented 20 million tonnes of soy from the US in the current marketing year, or 70% more than last year, sellers are counting on an even stronger Chinese appetite this year, with the worst of the financial crisis widely thought to have passed.

 

 

"Everyone's keen to profit from the good crushing margins we're seeing now but not everyone's sure about demand after March. Weakening physical prices could soon sour crushing margins," said a trader.

 

The volume of US soy arriving in China in December was seen by traders at a monthly record of more than 5 million tonnes. The China National Grain and Oils Information Centre estimates US exports will hit 12 million tonnes in January-March, far above the 8.4 million tonnes shipped in the same months of 2009.

 

Buyers bringing in the extra volumes may be banking on a recovery of demand for animal feed and reduced harvests of soy within China, traders said. But several factors make China in the first quarter of 2010 look a much tougher environment for imports than a year-ago.

 

Last year, China attracted imports by offering local farmers a fixed price, creating a market for cheaper beans from abroad. This year, the government renewed its offer to farmers but it is also offering crushing plants a subsidy to take Chinese soy, giving them a reason to prefer local crops to imports.

 

The subsidies have given an extra impetus to demand for the domestic crop. CNGOIC expects the volume of Chinese-grown beans crushed to triple this year from 2 million tonnes in 2008-09.

 

Further volumes are expected to come onto the market because the government buying agency Sinograin is "rotating" some of its stocks of imported soy - releasing them to the domestic market before replenishing with a fresh order of imports.

 

Sinograin's reserves include more than 1 million tonnes of imported soy and it is likely to rotate about 400,000 tonnes out of its stocks by the end of January, traders said.

 

The import half of Sinograin's operation is not expected to arrive until after the first quarter, so its rotation is not counted among the wave of imports expected by the end of March.

 

US imports were spurred by crushing margins based on Dalian soyoil and soymeal prices that were bolstered by a flood of bank credit in recent months. However, those margins could sag if excess soy translates into a surplus of the two products, edible oil and animal feed.

 

Soymeal demand is likely to be pressured this month and the next because of the Lunar New Year holiday, when Chinese farmers traditionally slaughter large numbers of livestock.

 

CNGOIC now expects China to import 40 million tonnes in the year to September 2010, up from its earlier estimate of 38.5 million. That compares with a record 41.1 million in the 2008-09 marketing year, according to China's Customs.

 

As well as the threat of weak demand, US soy shipments from March onwards could also face a threat from alternative suppliers, since South America's two big exporters, Brazil and Argentina, are expected to see a record harvest.

 

Latin American soy normally displace US imports from March or April, but last year US exports held on to a bigger than usual share of the Chinese market throughout the year as Argentina suffered a drought.