March 20, 2013
Chinese hogs, US planting implies weak soy prices today, a stronger market tomorrow
Slack Chinese demand today, a small US soy crop in six months, and a long term price forecast.
by Eric J. BROOKS
An eFeedLink Exclusive Commentary
Whereas the last few weeks has seen corn rise 5% and firmly above US$7/bushel, soy' performance has been underwhelming. This is partly due to Latin America's infrastructure woes catching up with it: China cancelled 2 million tonnes of Brazilian imports after only 2 of the 12 cargoes scheduled for January and February arrival times actually arrived. Normally, that would mean a win for US soy producers but in this case, it may not be.
Hogs drive China's soy demand more than any other protein line: According to eFeedLink, after rising 12.6% from 411 million head in March 2012 to 463 million head in January 2013. That drove China's growth in soy consumption (and imports) over the past year. Normally, the late first quarter sees a cyclical drop in hog numbers, as pork consumption usually falls in the month following Chinese New Year. This year however, the drop in hog inventories (and soy demand growth) might be sharper than usual.
eFeedLink reports that since peaking at RMB17.70RMB/kg (US$2.84/kg) in mid January, China's live hog prices have fallen by 22%, including a 10.4% fall in February, and a 2.7% decline in the first two weeks of March. In February, that reduced hog farm profits at large Chinese farms to just RMB1.82/kg (US$0.29/kg) and made the small farms that account for 40% of the country's swine output incur losses of RMB0.06/kg (US$0.01/kg). According to US Commoidities, "Poor hog margins in China are causing a slowdown in the soybean crush."
With Latin America's export window for the new harvest due to open soon, slack Chinese soy demand could put South American producers, especially Brazil with its record 83 million tonne crop, in a bind. But at the same time, soy cannot drop more than the US$14/bushel range it is currently trading in.
While China's soy import growth is estimated to be 5.9% (from 59.5 million tonnes to 63.0 million tonnes), this amount still will equal 105% of closing 2012-13 world soy inventories, which equal a lower 60 million tonnes. After falling from 69 million tonnes in 2010-11 to 55 million in 2011-12, the world needs a good US harvest for its collective soy inventories to exceed annual Chinese imports, and bring the market to a more stable even keel.
But it may take a year rather than six months for it to reach this goal: The next contribution to world soy inventories will be coming from the autumn US harvest, and it does not look to be a large crop. For soy crop acreage to expand, the soy/corn price ratio should exceed 2.5. At the time of this report, it was only 1.94. Unless soy rises relative to corn in a drastic manner over the next month, that implies America will plant more cropland with corn and wheat, and less with soy.
Hence, despite soy's price softness, dynamics favouring corn planting imply the oil seed will have long-term price strength. Assuming the current price trend continues, with the US producing a modest soy harvest and Chinese soy demand ramping up (as it always does) late in the year, that implies that even if soy performs weakly compared to corn now, it should find new market strength towards the year's end.
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