June 22, 2012

 

China's farm products futures seen firmly stable

 

 

The growth momentum of China’s agricultural products market is likely to remain strong as the country slowly changes to a consumption-oriented society.

 

However, the demand of industrial products generated by the reformed development model may fall back, given the government's discouragement of investment-led economic growth.

 

The trends followed by agricultural products and industrial products on China's staple commodity markets are likely to diverge as the biggest global commodity importing and exporting country is adjusting its economic structure and transforming its development model.

 

In the second half of this year, agricultural products are likely to continue to outperform industrial products, with soymeal and soyoil looking set to maintain their robust rise, market analysts predicted at a seminar on summer commodity market investment strategy held on Tuesday (June 19).

 

The macroeconomic environment is still a determining factor of benchmark farm produce prices. At present, China's slowing economic growth, coupled with recession risk of the European economy and the weak recovery of the US, is weighing down the commodity market.

 

"Currently, the aging of population is a trend which is leading to demand for meat and edible oils following a downward path," says Sun Jin, assistant to the general manager with Mailyard Futures. In the coming five to 10 years, meat demand is anticipated to slow down its pace of growth, he adds.

 

"If meat consumption goes down, demand for soymeal and corn will decline," notes Li Yongmin, a senior researcher with Green Futures.

 

However, industry insiders point out that besides the aging factor, the change of production and sales structure is more important and expected to dominate the agricultural commodity market.

 

According to Qi Zhiyun, director of the research department of China Investment Securities, as China is pushing forward the urbanization, many farmers are turning from suppliers of corn, grain, and soy to consumers, and the increase in demand from this is far higher than the reduction brought by aging. In the light of this, China's meat, protein, food, and sugar consumption will still have plenty of room to grow.

 

"If the government raises farmers' income and each of them is able to eat half a kilogram more of meat for a month, the current pork market will face a supply shortfall," Qi says. That can explain why so many large enterprises are trying to move into the pig industry.

 

Qi holds that there is a good outlook for this year's soymeal and soyoil prices, and expects soymeal to show the strongest performance.

 

"Now, many large enterprises are making great efforts to move into the breeding sector and quite a few of state-owned companies have begun to build big farms for pigs, chickens, and ducks," Qi says. In the following three to five years, all of the individual chicken and duck raisers are expected to withdraw from the market and large-scale breeding farms will shape up to boost sustainable growth in soymeal consumption.

 

Currently, soymeal prices are rising steadily while soy oil prices are fluctuating and show signs of bottoming. Once soy oil futures prices top the resistance of RMB9,380/tonne (US$1,473.48), they are likely to experience a rally.

 

Meanwhile, market analysts are generally bearish about cotton, corn, and sugar prices and think that the recent prices rebounds have mainly been propped up by production costs.

 

In the long run, industrial products prices are likely to follow a downward path as China's economic growth risks declining and the economic growth model depending on fixed-asset investment may not last for long, according to Liang Lijuan, a senior analyst with COFCO Futures.

 

He Zanhui, director of research institute of Huishang Futures, believes that the steady growth of China's economy will underpin the staple commodity market. However, with high stock levels and a slow consumption season in the May to July period, industrial products prices are likely to seek the bottom over the coming two months, he adds.