March 1, 2012
CBOT soy ascendant: Rising Chinese demand, falling world harvests push up prices
China soy crushing margins are turning positive and livestock demand is surprisingly strong. Will a drought-withered Latin American crop coincide with rising import volumes? China's soy price ratios provide a clue.
An eFeedLink Exclusive Commentary
by Eric J. BROOKS
After two years in which corn grabbed most of the attention, is soy about to steal back the limelight? A coincidence of supply and demand trends is beginning to imply that it will. Soy is up nearly 10% since the beginning of the year and almost 20% from its mid-December lows. We approach our analysis of this market turn from successive supply and demand angles.
Surprisingly strong post-Chinese New Year soy demand & imports
On the demand side, China absorbs at least 55% of the world's soy imports and its fundamentals suddenly look more bullish. Previously crushers suffering net losses resulted in the country importing less soy in late 2012 than was expected. Many anticipated that with crushers running net losses, import growth would slacken off too.
Instead, China's national statistics office reported that when production resumed in early February after Chinese New Year, crushers margins turned sharply positive.
Moreover, their reason for turning positive is loaded with implication: Higher domestic soymeal prices certainly helped but what really surprised market observers was the untimely rise in demand for soymeal.
Untimely because February, the month after Chinese New Year, is notorious for being a cyclical bottom in both livestock inventories and feed demand. If feed and livestock numbers are rising strongly during a cyclical bottom, it portends very strong soy demand growth into the second and third quarters, when meat demand typically rises.
Strong demand manifested itself in China placing an import order for 3.585 million tonnes of US soy in late February (with several thousand tonnes to be split between two marketing years). This followed 8.5 million tonnes of US soy ordered earlier in the same month.
It also coincided with China's reporting that despite the record 55.5 million tonnes of soy imports, China's imported soy inventories fell by 8%, from 6.2 million tonnes in February 2011 to 5.7 million tonnes this February. All this has given the soy market a strong upwind over the last month.
Import momentum in rebounding China soymeal/China soy price ratio
The real question is whether we can expect China's new found soy import momentum to continue. The answer is a conservative, somewhat qualified 'yes.' While there is not much of a correlation between China's domestic soymeal price and CBOT soy, import volumes do seem to follow the ratio between domestic Chinese soymeal and domestic China soy prices.
China's soy import acceleration began in 2008, when this ratio moved above 80%. By 2009, with the ratio well above 90% and even 100% at times, import growth momentum hit its peak. From late 2010 to mid 2011, even when this ratio fell to the 80% to 90% range, imports grew strongly.
China soy imports only tailed off in the late third quarter of 2011, when this ratio fell below 80%, and bottomed out at 69% in late December. Since early January, China's soymeal prices have increased 10% while domestic soy remained flat. This has pushed the domestic soymeal/domestic soy price ratio back up to 78%, near the 80% trigger point at which import growth accelerates.
Along with unexpectedly high livestock demand and falling inventories, China soymeal's improving price ratio to domestic soy implies that China's soy importing propensity is once again accelerating. Oil World now expects China's first quarter 2012 soy imports to total 12.5 million tonnes, 14% than the slightly under 11 million tonnes imported in the first quarter of 2011.
South American drought, US planted area tightens supplies
With soy import market's import growth assured, we now turn to supply questions -and find ourselves facing a problematic situation. For about the third consecutive year, China finds itself importing a lot of US soy at a time of year that Latin America should be carrying the export burden. That is because South America's La Nina drought is forcing China to rely on Uncle Sam. Oil World reported that, "Due to serious crop losses in South America, China has become more dependent on US soya beans."
In all, this year's dry Latin American weather probably destroyed at least 6 million tonnes of Brazilian soy and 3 million tonnes of Argentina's expected harvest. US-import dependence is also due to poor Brazilian logistics: according to US Commodities, some 4 million tonnes of Brazilian soy is waiting in line, held up by congestion at ports, with more held back by capacity problems on roads and railways.
In the world of feed, the need to rely on America for grain when it is Brazil or Argentina's turn to supply it always pushes up prices. While this in itself tightens supplies, the big concern is now next year's crop.
First, thanks to Latin America's drought, Oil World expects this year's world soy output to fall by a record 19 million tonnes or 7.2%, to 246.5 million tonnes. This after the USDA projected a 13 million tonne reduction, which now looks too conservative. Most analysts are expecting a Brazilian soy crop below 70 million tonnes, compared to 75.5 million last year.
Similarly, the Rosario (Argentina) Grain Exchange slashed earlier hopes for a 50.5 million tonne Argentine crop back to 45.5 million tonnes -significantly less than the 49 million tonnes reaped during the previous harvest.
However, there is some dissension on the Latin American numbers. Some market observers argue that late February's South American rainfall, while it was too late for the corn crop, may have rescued some of the soy presumed lost. Others also point to the fact that the rising soy price could persuade US farmers to shift more planted area in favour of the oil seed and away from corn.
Even so, this cannot change the fact that China is being forced to rely on US soy during the first and second quarter for yet another year. Any Argentine or Brazilian crop 'saved' from drought by late rains will be offset by a resulting reduction in America's already thin soy inventory levels.
With all this in mind, it is clear that China's demand shows signs of rebounding and exporters have supply-side issues.
China's crushing margins need to be watched carefully, as does its ratio between domestic soymeal and soy prices. Nevertheless, provided that its livestock production continues to grow at an unexpectedly strong rate, it would be difficult for soy not to approach its 2008 price record.
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