May 20, 2004

 

 

US Sees Tough Soy Negotiations With China In Future

 

U.S. soybean market experts said the decision by Chinese crushers to actively cut soybean imports will initially be felt in South America, but the U.S. will not be immune from the new developments in the world supply and demand landscape.

 

On Sunday, China's 16 largest soybean crushers decided to combat expensive world soybean imports by joining to slow imports and share their existing stockpiles. China is the No. 1 buyer of U.S. soybean supplies and is the top customer for Brazil and Argentina as well.

 

Chicago Board of Trade soybean futures had already started to crumble due to speculative liquidation and promising news of a record-breaking soybean crop in the U.S., so the news from China only accelerated the race downward. In fact, from last week's high of $10.36 1/2 a bushel on the Jly chart to this week's low of $8.71, soybeans have fallen nearly 16% in value. Jly soybeans settled at $9.07 1/2 as the market rebounded slightly from the huge sell-off.

 

John Kleist, analyst for Kleist Consulting in Arlington, Heights, Ill., said the new organization of China's largest soybean crushers will lend them extraordinary bargaining power on the world table.

 

"I think they set-up something similar to an OPEC cartel, but from a consumer standpoint instead of a supplier," Kleist said. "Overall, it will make it tougher for the U.S. to gauge China demand. No longer will they buy beans at any price. They're going to use their considerable negotiating skills and manipulation to maneuver prices."

 

In the near term, the major soy exporting countries in South America - Argentina and Brazil - would see a greater impact as the countries are currently exporting their newly harvested soybean crops, analysts said. And with China, their principal buyer, backing out, basis levels there would suffer.

 

"It's a signal that they are trying to be much more efficient with their supplies," said Don Roose, president of U.S. Commodities in West Des Moines, Iowa.

 

Tight world supplies resulting in a shortfall in production in the U.S. and South America, matched with strong world demand, caused prices at the CBOT to leap to the highest level in 16 years. However, with the U.S. Department of Agriculture estimating this year's soybean crop at a record 2.965 billion bushels, good planting weather and worries of a slowdown in China's economy, the market was unable to withstand the massive fund sell-off and news of Chinese crushers trying to cancel imports. In the last five days, funds have sold an estimated 35,000 to 40,000 contracts. The Commodity Futures Trading Commission estimated that as of May 11, funds were net long 42,892, futures and options combined.

 

Ironically, China has been part of the problem for the shortage in world supplies, the high prices and the volatility in trading. As the world's largest importer of soybeans at an estimated 20.5 million metric tons this marketing year, up from 10.38 million two years ago, China's appetite for protein has been voracious. The U.S. ranks as the No. 1 supplier to the country, selling 8.229 million tons of soybeans to China so far this year.

 

The extreme volatility resulting from the scarcity of soybeans is freezing world trading, Roose said. The massive $1.65 1/2 drop witnessed over the last week at the CBOT is going to invite more buying, he said, and the Chinese will then want to repossess the cargoes they wanted to sell back. And yet a sharp move in the other direction would cause the Chinese to respond again with a chokehold on imports.

 

"We know what kind of rationing job was done at $10.00 - it was minimal. And at under $8.00 or $9.00, we'll have a lot more to do," Roose said.

 

In 1988, the price of soybeans dropped from $10.99 1/2 down to $8.56, and then bounced and rallied to $10.20 in three days on the Jly contract. The same situation could happen again in this volatile soybean market, Roose said. "It's not out of the question here if you believe in the rationing theory," he said.

 

In addition, Kleist said, the beans the Chinese crushers are currently sitting on were bought at very high prices and bought on credit. And with crush margins falling apart, the Chinese crusher is facing a real crisis. "They're sitting on some pretty high-priced inventories and can't sell the meal at a profit," he said.

 

Organizing together to gain power to renegotiate cargoes of soybeans already purchased makes sense, Kleist added, but it makes for an interesting situation.

 

"One, they've got their reputation on the line. Two, if they can't renegotiate their purchases, they'll be sitting on a mountain of debt."