October 17, 2012

 

China soy market to continue bull run after correction

 

 

China's soy market is expected to continue with corrections it is undergoing to the following days of October after an increase in August, tracking global rises.

 

However, expectations of an output cut in the US and uncertainty in South America soy production are potential factors to push up soy prices in the remaining period of the fourth quarter.

 

The latest supply and demand report released by the USDA raised unit yield and output of US soy, but this has not changed the fact that US soy output is likely to drop in this crop year. Firm supply and demand fundamentals have been a major factor underpinning US soy prices recently.

 

Seasonally speaking, mass supply of new soy is anticipated to weigh on prices. This year, the US soy harvesting is the fastest compared with the same period for some years, and this has exerted some pressure on prices.

 

However, in a year that sees output decline, the marketing season of new soy usually has a limited impact on prices and sometimes even triggers panic purchases, which in turn drives up futures prices.

 

In addition, output decline and firm demand will probably exhaust the already historically low level of stocks in the US.

 

Currently, the South America soy producing areas have entered the planting period. The USDA maintains its forecast that South America will see a rise in soy planting area and output. It has predicted that soy output in Brazil and Argentina will respectively gain 22% and 34% on year to reach 81 million tonnes and 55 million tonnes in the crop year 2012-2013.

 

As South America soy are expected to come onto the market between March and April next year, there are still lots of uncertain factors in the half-year planting period. Even if South America achieves a bumper harvest, the global soy market can at best only keep a tightly balanced supply and demand relationship.

 

At present, expectations for planting area expansion as well as the abundant rainfall brought by the El Nino phenomenon are resulting in optimistic forecasts for South America soy production. However, recently, the El Nino phenomenon has not been as strong as expected. Meteorological experts worry that El Nino may turn to having a neutral impact rather than a beneficial one and thus reduce the potential for a soy output rise in South America.

 

Analysts say that China's feed demand in the fourth quarter is likely to continue to be robust as pig stocks are now at high levels. Meanwhile, pig prices have a high possibility to move into a periodical rise period and this would likely boost farms' restocking demand.

 

In the first half of this year, soy prices have been rising while downstream pork prices have been falling rapidly, which has led to a slide in the profitability of pig farms and in some cases losses. With the government's implementation of the frozen pork purchase policy, pork prices began to pick up in August and the disparity between pig prices and feed prices has also been picking up to reach 6.03:1, higher than the breakeven point of 6:1.

 

Besides all this, the net position of funds for soy futures traded on the Chicago Board of Trade has slowed down its pace of decline recently and is still a high level compared with that in the past four years, which indicates that capital's enthusiasm for investing in soy has not significantly cooled down.