FBA Issue 23: November / December 2008
Perspective: Soy - A large harvest weighs down prices
After peaking at record levels of approximately RMB5,538/tonne for imported soy in early July, it crashed over a period of two months. Prices stumbled into their yearly trough by early September. At that time, an inflationary response to the default of America's Lehman Brothers and AIG's collapse stabilized CBOT soy, China soy and a raft of other commodities along with them.
Previous to that in early July, prices charged ahead as an Argentine farmers' strike showed no favourable outcome and unrelenting oil price increases pushed freight charges to frightful levels. Then, prices plunged 11.3 percent or RMB563 to RMB4,975/tonne as oil fell from $147/barrel in early July to $90 in September before rebounding to a little over $100/barrel due to the financial panic's monetary reflation.
Consequently, in early September, imported soy prices dropped 8.3 percent or RMB415 to RMB4,560/tonne. Locally produced soy basically shadowed the price trends of its imported counterpart, except for an even steeper plunge in the month of September. In July, prices Heilongjiang soy bean shot to historic high of RMB5,280/tonne, with Ssoymeal surging in tandem to a record level of RMB4,585/tonne.
Tracking the decline of CBOT soy prices, China produced soy dipped 11.7 percent or RMB555 to RMB4,725/tonnne in August. Aggravating the situation was the shrinking of crusher's profit margins. Consequently, soymeal saw a bigger drop of 13.7% or RMB553 to settle at RMB4,032/tonne.
However, the tumbling did not stop here. In September, in anticipation of increased soy supplies due to optimistic projections for the coming harvest, Heilongjiang soy dived to its yearly low of RMB4,072/tonne--this was 13.8 percent or RMB 653 lower than in August. Sliding by a smaller margin, soymeal prices decreased 2.9 percent or RMB116 to RMB3,916/tonne, a four month low.
Weaker prices ahead?...
Moving forward into the fourth quarter, the upcoming US and Chinese soy harvests are both expected to be bountiful. Short term soy is therefore seen to decline and hover around RMB4,500.
There is however, a limit to soy's downside and scope for possible inflation. First, in China, farmers are demanding higher selling prices to cover steep production cost increases. In this respect, government policies aiming to ensure profits of farmers will lend support to domestic soy prices. It is likely that transaction prices will be in the range of RMB3,600-4,000/tonne. Soymeal prices are also expected to soften to the range of RMB2,500-4,000/tonne.
Second, on September 26, Argentine farmers reignited their earlier dispute with their government. They demanded lower export taxes to make up for lower soy prices and threatened to again disrupt exports. This will not affect China supplies materially for now, as imports will be mostly supplied by the United States for the next several months. However, new Argentine strike activity could cause supply shortage fears to reignite later in the year.
Third, while soy is not linked to oil prices in the same way corn is, the price ratio between these grains determines the relative proportion of farm land planted with each of them. Recently, oil prices bottomed out and with them, the decline in corn prices leveled off too. Should soy prices fall under the weight of large harvests while corn and oil stay constant, farmers may opt to plant more corn and less soy next year. This would sow the seeds for a soy price rebound in the next growing season.
Finally, commodity markets are being rocked by deflationary financial collapses and equally inflationary bailouts. The resulting battle between inflation and deflation makes it increasingly difficult to determine which one will affect soy prices more. All in all, this peculiar mix of factors creates a large overhang of uncertainty.
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