January 26, 2011

China seals US$6.7-billion US soy deals

China signed agreements to buy US$6.7 billion worth of US soy last week during President Hu Jintao's visit to the US.

Chinese firms bought a total of 11.5 million tonnes of soy for delivery through the September to August 2011-2012 marketing year. The agreements equalled more than half total Chinese imports of US soy in 2010.

The country imported 57 million tonnes of soy in the 2010-2011 marketing year, of which 24 million tonnes originated in the US. Soy declined last week in Chicago after reaching US$14.325 a bushel on January 13, their highest level since July 2008. Futures contracts for the oilseeds have risen nearly 50% in the past year.

The Chinese soy deal will surely boost prices still higher in the short term in an environment of broadly rising agricultural commodity prices. Market watchers had expected some kind of Chinese soy deal to come out of Hu's trip, but the size of the agreement was much larger than anticipated.

The immediate market reaction could therefore overestimate the effect of the deal on global supplies. However, taking into account US government forecasts of tight soy supplies in the coming months, any correction would be limited - prices will remain high. Large US soy producers including Archer Daniels Midland, Monsanto stand to benefit significantly. Higher agricultural prices overall will encourage greater production, a potential boon for farm equipment manufacturers such as Deere and Company.