FEED Business Worldwide - July 2012

 

Tight soy inventories face off against China's plunging money supply  

 

by Eric J. BROOKS

 

 

After approaching its 2008 record in the early second quarter, soy prices have retreated by up to 10%, currently hovering near US$14/bushel. But we should consider this a floor a launch pad to a year of price volatility, with record prices and sudden downward swings both becoming increasingly probable. Bluntly put, the world is facing a year of exceptionally tight soy supplies, high Chinese soy consumption and the specter of a sudden demand downturn in the latter.

 

Previous articles pointed out that whenever Chinese soy imports exceed 90% of world inventories, price inflation occurs. This condition is now well in place: The latest USDA report places 61 million tonnes of 2012/13 China soy imports at 105% of ending world inventories, which are projected at 58 million tonnes. This is substantially higher than the 94% ratio which caused the 2008 CBOT soy price record to be set.

 

 

 

But one statistic does not on its own tell the story of this key oilseed's rapidly tightening fundamental. Perhaps the greatest symptom is that of falling inventories. Since the start of the 21st century, we've gotten accustomed to corn inventories being in shorter supply than soy. This is no longer the case: According to the latest USDA projections, by the end of 2012/13, America's corn stocks-to-use ratio, while low

 

With the record 28.3 million tonne, 10.6% drop in the world harvest from 264.7 million tonnes to 236.4 million tonnes, inventories and export profiles are being impacted in the worst way possible. With America's soy growing acreage long maxed out, most analysts had expected Brazil's soy exports to have overtaken America's by this time. Instead, two consecutive dry seasons have resulted in a situation where Brazil's soy exports will only equal those of America this year - and the United States will need to export at least 4 million tonnes of soy more than Brazil in 2012/13 marketing year.

 

As a result, the USDA's most recent report  slashed ending America's soy inventory estimate by another 20%, from an already low 4.77 million tonnes to an alarming 3.81 million tonnes. It goes without saying that US feed crop inventories set the tone for world prices –and that America entered this marketing year with soy stocks in the single digits.

 

Given the steep plunge in southern hemisphere production, this makes the export-driven, inventory run down of US soy supplies quite inflationary. Amid record corn acreage plantings and flat soy acreage, the USDA expects the country's 2012/13 corn stocks-to-use ratio to recover to 13.7% –while  its soy stocks-to-use ratio to fall to 4.3%. The projected stocks-to-use ratio is even lower than corn has ever gone, and nearly equals this oilseed's mid-1960s record  low of 4.0%.

 

Sal Gilbertie, president of Teucrium Trading noted that,"Soya beans are the corn of two or three years ago." According to Gilbertie, to bridge this supply deficit, "relative to corn, soybean prices are going remain high throughout the new crop year. We are looking at more than a year of high prices."

 

What is interesting is that while we fully agree with Mr. Gilbertie's reasoning, we only partly agree with his conclusion. Supplies will remain very tight for at least a year but are there macroeconomic factors at work undermining the latter half of this one-year price forecast?

 

 

 

Over the short-term, this tight forecast is correct loaded with inflationary implications: China's feed demand usually takes off in the second half of any calendar year, when the Mid Autumn Festival and the fourth quarter's Chinese New Year preparations boost swine output. Of course, even if South America's next crop is excellent, it will miss these upcoming peak demand festivals, making for reliance on thin old crop supplies and America's upcoming harvest.

 

Indeed, at the time of this writing, soy is, in anything, underpriced: With corn near US$6/bushel, soy should be above 2.5 times higher or above US$15/bushel to attract more Latin American land to its cultivation and away from corn. This need for soy's price to be high enough to attract land from other crops is especially true for the southern hemisphere, where only near-record prices can bring uncultivated Brazilian land into production. (see preceding article: "Soy imports, price trends and the true cost of China's meat consumption.")

 

 

 

Going beyond this year, it takes a certain degree of self-discipline to keep ourselves from seduced by soy's bullish supply fundamentals. Even if the waters off South America continue to warm up and provide the rains necessary for bumper Brazilian and Argentinean harvests, the impact would not be felt until the second quarter of 2013.

 

The problem with such assumptions is that they ignore the growing impact of macroeconomic policies on feed crop prices. Over the past five years, subprime bailouts, the Lehman/AIG crash, Quantitative Easing and the EU debt crisis have profoundly distorted corn and soy's recent price cycles. Stoking feed crop inflation at some times, inducing unjustified deflation at others, global liquidity's influence over feed crop prices is greatest at economic turning points –and we may be entering the mother of all deflationary macroeconomic upsets.

 

For all intents and purposes, China owns the world soy import market –and up to now, China's soy demand growth has been taken for granted. Even during the 2008/09 recession, China's soy import demand growth slowed down but it did not halt. That may soon change.

 

In 2008, we correctly called the US money supply downturn several months before it decimated the prices of corn and soy. This time, the money supply is shrinking at an alarming rate in the China, the world's largest soy consumer and importer.

 

According to Ambrose Evans-Pritchard, financial columnist for the Daily Mail, "All key indicators of China's money supply are flashing warning signs...Narrow M1 data for April is the weakest since modern records began. Real M1 deposits - a leading indicator of economic growth six months or so ahead - have contracted since November." According to the June issue of Forbes magazine, China's total stock of M1 money fell by 5% in the first four months of the year, which implies a an annual growth rate below -10%.