May 26, 2004

China-Brazil Soybean Trade On Track Despite Disputes

A string of recent developments may have slowed soybean trade between China and Brazil, but Brazilian farmers need not worry about future exports to China as it will be "business as usual" once the current issues are sorted out, Chinese soy crushers and government researchers said Tuesday.
 
"It is in China's interest to cultivate and ensure a long-term, steady supply of cheaper and better soybeans from South America," to meet the growing demand, said Zhang Zhaoxin, a researcher at China's Ministry of Agriculture.
 
This overarching goal does not conflict with the quarantine authority's latest ban on two more foreign suppliers from selling Brazilian soybeans, he said. China had earlier banned four other suppliers, citing contamination concerns.
 
Following news that China banned two new foreign suppliers Monday, Brazilian exporters had said the development made it "practically impossible" to ship any cargo to China, its principal buyer.
 
But Zhang was confident China's recent moves are based purely on quality concerns alone. "Otherwise, why not Argentina? Why only Brazil?" he said, referring to the hitherto smooth import of Argentinean soybeans in the current season.
 
Ensuring a steady supply of reasonably-priced, quality soybeans from South America is the Chinese government's long-term policy goal, he said.
 
CHINA TO MAINTAIN A LIBERAL POLICY ON SOYBEAN IMPORTS
 
Yet, analysts find it hard not to see a connection between the recent hurdles in China's $25-million-a-year soybean trade with Brazil, as the ban coincided with the much-publicized credit squeeze faced by Chinese crushers amid months of sluggish feed demand and expensive cargoes that were booked when futures prices and freight rates were at their peak.
 
China's largest soybean crushers met in Beijing recently to coordinate future imports and negotiate delaying or even washing out some future shipments by paying a penalty.
 
"The recent trade disputes aside, let's look at the fundamentals," said another analyst at a Chinese government think-tank, who did not want to be identified.
 
As China's living standards improve, consumption of edible oil is rising at a pace of 500,000 tons to 700,000 tons a year. With the world's top soybean exporter, the U.S., unlikely to boost output and exports, South American exporters are guaranteed a liberal Chinese import policy, he said.
 
This change in the Chinese government's approach to handling soybean imports and managing the domestic soy crushing industry has been visible since 2002, he said.
 
In 2002, China took measures to reduce soybean imports to protect domestic farmers from cheap imports, but in 2003, imports bounced back to a record 20.74 million tons amid high domestic prices, an on-year rise of 83%.
 
While 7.35 million tons of the 2003 imports came from the U.S., the rest was mostly from South America, which as a region, overtook the U.S. as China's largest soybean supplier.
 
Moreover, with the current problems restricted to crushers, the government is unlikely go out of its way to limit imports as the large farming community has npt been affected by the problems, he said.
 
Despite confirmed cases of some big crushers seeking a merger or going for bankruptcy, the government's "attitude is (to) let the (competition) run its course," the analyst said.
 
PRICING RULE CHANGES UNLIKELY IN THE SHORT-TERM
 
Despite recent calls by the crushers who met in Beijing to change the "rules of the game", by linking soybean pricing to futures prices on the Dalian Commodity Exchange instead of Chicago Board of Trade prices, analysts say such a change is unlikely in the near term.
 
The 16 crushers who held the "crisis meeting" dominate 70% to 80% of China's total throughput. Active capacity, however, is said to be only 29 million tons a year.
 
The problems faced by China's soy crushers today are reminiscent of the "overheating" in the television manufacturing sector in the late 80's to early 90's, which lead to the consolidation of the industry into a few large "conglomerates."
 
International trading houses have brushed aside demands to link soybean pricing to Dalian futures prices as "ridiculous", saying such a proposal is impossible as well as illegal, given Chinese commodities futures are off- limits to foreigners.
 
A more workable solution, Chinese crushers now say, is to form a direct relationship with South American producers, thereby eliminating the need for middlemen.
 
"The current pricing and trade mechanism neither maximizes the interests of the buyer, nor the seller," said a manager who attended the meeting, representing a leading soybean crusher. He said the current system only helped large trading houses that artificially inflate prices.
 
As such, Brazilian farmers and Chinese crushers have much in common, he said.
 
But, a direct purchase mechanism will remain just an idea until big buyers and sellers develop alternative mechanisms to support trade, he said. Moving soybeans across the globe from South America to China would require more than just an agreement on the price.
 
Neither Chinese crushers nor Brazilian farmers are capable of handling everything from logistics to storage to insurance to international freights, and trade will therefore continue as usual, with some haggling over pricing, he said.