Since setting a new price record in the third quarter of 2012, CBOT soy has stayed in the US$14/bushel to US$16/bushel range -until recently that is, when it fell below US$13/bushel. To understand why soy's price has softened of late, and why it may soften more, it is good to keep abreast of the evolving relationship between the world market and its biggest customer, China.

 

After peaking around 15 to 16 million tonnes in the mid 2000 to late 2000s, competition from corn (which provides higher returns) has constrained China's soy growing acreage, keeping most harvests in the 11 to 13 million tonne range. This year is no exception, with the USDA expecting a 12 million tonne crop from a 6.8 million acre cultivated area. In fact, the planted area and crop could have been even smaller, except that bad planting weather delayed some intended corn planting until the narrowing growing season window was only viable for soy cultivation

 

But while China's domestic supply side remains relatively unchanged, demand and imports have both taken a tumble. March and April's H7N9 avian influenza infected both birds and several hundred humans, causing over 120 deaths of the latter. Pummeled by poultry culling and nose-diving consumer demand, from the beginning of April to the end of May, eFeedLink estimates that China's poultry inventories crashed 24% and while the pace of broiler replenishment fell by an even steeper 32%.

 

With a protein line that accounts for close to 20% of China's feed demand having its livestock numbers reduced by nearly a quarter, the demand for imported soy will suffer a setback, and it did. The country's demand for soy imports typically increases by 3% to 7% annually, and has done so for quite some time -but not this year.

 

In the 2012-13 marketing year ending August 31, instead of rising 5.9% to 63 million tonnes as originally forecast, the 2012-13 marketing year will see China import 59.0 million tonnes of soy, 6.4% or 4 million tonnes less than the USDA previously forecast. More significantly, this is 0.39% less than 2011-12's 59.2 million tonnes. It is one of the few, exceptional times since China began mass soy imports 19 years ago that year-on-year volumes have stayed flat or declined.

 

With H7N9 now under control and China's poultry demand rebounding, soy import growth should resume at a faster than average pace after the middle of the third quarter. 2013-14 volumes are projected to recover, growing 14.1% to 67.3 million tonnes, though this is still below the initial USDA forecast of 69 million tonnes for the next marketing year.

Collectively, 5.7 million tonnes of soy import demand have been cut from the world market over a time span of 1.5 marketing years -and this carries long-term implications for CBOT soya bean prices. As mentioned in some of our previous soy market articles, the ratio of Chinese soy import volumes to world soy inventories is strongly market driver, exerting inflationary or deflationary pressure depending on which number is more abundant. Generally speaking, when the ratio exceeds 90%, the soy market has an inflationary bias, whereas a ratio below 90% is deflationary.

  

For example, soy's record breaking 2008 rally occurred when China's soy imports began to equal about 95% of world inventories, during the 2007-08 and 2008-09 marketing years.  When this ratio fell to 82.3% and 79.4% during the 2009-10 and 2010-11 marketing years respectively, CBOT soy went through a few years when it rarely went about US$10/bushel, never rallying above US$12/bushel except very briefly during the entire time.

 

After a succession of bad South American harvest pushed down world inventories amid rising Chinese import demand, the ratio of China import demand to closing world inventories jumped to 108.1% in 2011-12 and a still inflationary 96.4% in 2012-13. This coincided with soy's setting of a new price record last summer.

 

Now, assuming America's soy harvest comes in at the expected 92.3 million tonnes, Latin America's soy harvest expands by a plausible, USDA estimated 4.9%,this ratio will fall to approximately 90%. While this is still somewhat inflationary, the two marketing year, 18% drop in the ratio of Chinese imports to world inventories from its previous 108% level takes a lot of inflationary pressure off the market.

 

Over the short term, China's softening demand for soy imports coincides with dwindling the US soy growing season, meaning that North America's soy stocks will fall in tandem with China's lower demand. This should make any soy price decline at this time gentle, and its price fall for now may be as much due to tightening world monetary conditions as it is China's bird flu epidemic.

 

But once America's harvest comes in, it will be crucial to keep a sharp eye on China's pace of soy import orders. If they do not recover at the 14% year-on-year pace predicted, or if a big American harvest coincides with a monetary squeeze induced drop in commodity price levels, CBOT soy's cost could fall with a rather large thud.