China may have to act fast to poor soy auctions sales

The Chinese government may soon have to consider measures like subsidies for processors in order to dispose off its soy stocks as the fourth state soy reserves auction held Wednesday (Aug 26) did not have many buyers, according to analysts.

 

The situation is likely to be compounded further by the acute shortage of storage space, with new crops scheduled to arrive at the granaries in the next few weeks.

 

The fourth auction saw the sales of 9,600 tonnes out of the total 500,000 tonnes of soy on offer at a price of RMB3,750 (US$548.63) per tonne. Currently, China's granaries hold about five million tonnes of soy.

 

China Grain Reserves Corporation (Sinograin), the government designated manager for the national grain reserves, has also expressed its concerns on the storage pressure.

 

One of the solutions that the government could consider is to move the reserves from the existing storage locations in northern and northeastern China to the warehouses in southern China. However, the high transportation costs involved is a stumbling block.

 

The logical course for the government is to subsidise soy processors so that they will procure the reserves. This plan assumes more significance as most processors in southern China are switching to cheap and high-oil-yielding imported genetically-engineered soy.

 

When the market price of soy was only around RMB3,000 per tonne in 2008, Sinograin raised the purchasing price to RMB3,700 per tonne to protect the growers' interests. With current prices hovering around RMB3,750 per tonne, the company cannot expect to gain much by holding on to the inventories.

 

Meanwhile, processors are not too keen to pay higher prices for the reserves. Tian Renli, general manager for Heilongjiang Jiusan Oil & Fat Co, a leading processor, said they will incur more losses if they buy at the current prices and without any subsidies. He added that the acceptable price should be about RMB3,400 per tonne as they have to spend another RMB400 for packaging and transportation.

 

Furthermore, international soy prices have declined sharply due to the global recession and it encouraged the influx of cheap imports, said analysts. Customs statistics showed that China imported more than 34 million tonnes of soy from January to November 2008, an on-year increase of 22 percent.

 

US$1=RMB6.835 (Aug 27)