China demand, South America crop issues drive soy price surge

Hefty demand from China has been a staple in a month-long rally in Chicago Board of Trade soy futures, with fears of lost South American production due to dryness issues rekindling bullish enthusiasm.

 

Soy prices have climbed to their highest levels in three months, rebounding after a five-month slide from all-time highs in July 2008. Demand from China has been an underpinning force in the market, with production uncertainties in Argentina and parts of Brazil raising fears that any shortfall in South American output could lead to further drains on already tight projected US inventories.

 

Brazil and Argentina are the world's second- and third-largest producers of soy behind the US. 

 

"Thursday's (January 9) US Department of Agriculture export sales report highlighted the importance of China to the US soy export picture," said Anne Frick, senior oilseed analyst with Prudential Bache in a market report. Total US soy export commitments to China are 11.871 million tonnes, up 20.9 percent from 9.818 million last year. China accounts for 56.8 percent of the total US soy export commitments.

 

Exports are a key ingredient in the overall makeup of soy prices, but one hindrance to overall price strength remains sluggish domestic usage.

 

The soy crush, which produces soy meal and soy oil, remains sluggish because of reduced livestock and poultry numbers, said Bill Nelson, analyst with Doane Advisory Services in St. Louis, Mo.

 

Soymeal is a key source of protein in livestock and poultry feed rations and the largest component of the soy crush.

 

While export demand to China has flourished despite global recessionary times, demand from other top importers have not followed suit. Mexico, the second-largest buyer, the European Union, the fourth-largest buyer and fifth-top buyer Taiwan purchases are down 24 percent, 14 percent and 5 percent respectively from year-ago levels.

 

In recessionary times, consumer income is down and that will result in less demand for animal protein - milk, meat, eggs - and that will drop demand for soymeal, which are feed rations in developing countries.

 

US dependence on Chinese demand is raising doubts about the sustainability of the US export pace. Questions arise about how demand will hold up if China shifts its buying needs to South America after the Lunar New Year holidays at the end of January.

China's buying exuberance has placed a great deal of importance on South American production, and perceptions of problems with southern hemisphere crops increases the potential for larger demand for US supplies beyond the normal early year seasonal trends, said Joe Victor, analyst with Allendale Inc. in McHenry, Ill.

 

Crop stress in some South American growing areas and Chinese demand take centre stage as the leading fundamentals in price firmness. Dry weather is stoking fears of major drought damage to the Argentine soy crop.

 

South American weather has caused a reallocation of focus in the market place, enticing traders into adding risk premium back into prices, as soy have legitimate fundamental issues supporting prices, said Dan Basse, president AgResource Company in Chicago.

 

Overall, two-thirds of Argentina's soils are dry enough for crop stress, and near term rainfall is not expected to be sufficient to offset net drying conditions, said Drew Lerner meteorologist with World Weather Inc.

 

In addition to the concerns over South American crops, there is a strong bias in the market for possible reduction in the USDA's estimate for 2008-09 US soy production and ending stocks when it releases its January crop updates Monday, said Nelson.

 

This potentially tighter US inventory projection in the midst of high demand for protein from China serves as another catalyst to keep futures climbing if crop issues persist in South America.

 

In addition, issues surrounding South American credit issues and how it affected planted area and input cost are underlying factors that will impact total southern hemisphere output and eventually direct world importers in their quest for available supplies, analysts said.