August 6, 2012

 

China's agricultural commodities see downside risk

 

 

The agricultural products prices of China may encounter struggles after reaching high levels, with the possible cooling of capital speculation, soft downstream demand, and government regulation.

 

Since early June, dry and hot weather in the US major crop regions has stimulated a persistent rise of US soy and this has also significantly driven up soy prices in China.

 

The US soy crops will enter the pod bearing period in August. Weather forecasts say that there will not be widespread rainfall before the middle of August. At present, weather and output concerns continue to support the rally of US soy, which are expected to return to the earlier high point of 1,700 cents/bushel.

 

However, Zhao Yan, an analyst with Everbright Futures, says that earlier consecutive rises of US soy have already reflected expectations for unit yield decline. Unless the USDA sharply cuts its forecast for unit yield in a report due on August 10, the US soy market is likely to slip back on profit-taking, she adds.

 

Besides speculation on adverse US weather, robust capital flow into the soy meal market is another factor pushing up prices. It is noticeable that after a mild fall-back of soy meal prices last week, capital has become prudent in trading and long positions are being prepared for liquidation once unfavourable cues appear.

 

Currently, feed enterprises are refraining from procurement due to soft demand from the breeding industry. Meanwhile, pig farms are active in selling for slaughter in the face of depressed pig prices and this will hamper soy consumption.

 

The main domestic feeds such as soy meal and corn have soared recently. The downstream feed enterprises with low stocks continue to replenish stocks. At present, large feed enterprises' stocks have increased to 25-30 days' consumption while the raw materials inventories of small and midsized feed companies remain at 7-10 days' consumption.

 

Meanwhile, as soy meal prices are rising, market transactions tend to be slim. "It's difficult to find big transactions in recent period," said an oil crushing mill. To reduce soy meal consumption, many breeding companies are increasing the use of wheat, cotton meal, and peanut meal to substitute for soy meal. This will further reduce demand for soy meal.

 

As agricultural products prices are rising, the Chinese government is expected to introduce more regulative measures to stabilise the market.

 

"China's recent regulative policy for the edible oil market indicates that a high level of spot prices will trigger demand for market regulation," says Zhao Yan.

 

In informal talks, the National Development and Reform Commission, the nation's price regulator, on July 24 asked four domestic edible oil crushing mills not to raise prices for now. In addition, the government has increased the release of reserve soy. Since July, the country has sold off more than 1.5 million tonnes (tonnes) of soy from state reserves at auctions, with transaction rates approaching 100% from the middle of July.

 

Robust trading at reserve soy auctions shows that domestic soy have become more appealing as the US soy rise to high levels. It also reflects that the government is strongly determined to stabilise prices by maintaining the frequency of auctions at about twice a month.