November 19, 2007

 

China's purchase of US soy undeterred despite high prices

 

 

China's buying of US soy remains unabated despite 19-year price highs that are curbing the 2007-08 export sales pace.

 

The market is doing its presumed job of demand rationing based on higher prices in some countries, but the price levels at this point are not daunting China's interest, said John Kleist, analyst with Kleist Ag Consulting.

 

Through the first 10 weeks of the 2007-08 marketing year, total US soy export commitments total 14.448 million tonnes, down 2 percent from the 14.704 million reported at the same time last year, according to data from US Department of Agriculture.

 

China by far is the dominant buyer of US soy, accounting for 7.060 million tonnes of the 14.448 million totals, USDA data shows. In comparison, Japan is the second highest purchaser of US soy at 1.393 million tonnes.

 

The buying spurt by China revives memories of heavy Russian buying of US grains in the 1970's, but China has a lot more money to spend than Russia had at the time, a CBOT floor analyst said.

 

China appears to be front-loading supplies ahead January 1, when a temporary Chinese import tax reduction reverts back to its normal level, said Kleist.

 

China cut its soy import tariff to 1 percent from 3 percent for three months starting in October to cool domestic prices, but the move only helped to boost international prices further, analysts said.

 

China's consumer price index (CPI) growth rebounded to 6.5 percent in October, matching August's almost 11-year high, with the main culprit food prices rising 17.6 percent, according to Chinese government data.

 

The jump in China's CPI raised concerns that it will cost more to buy soy, with fears of a possible interest rate rise in China hiking the cost of borrowing money to pay for imports. That is enticing Chinese importers to buy ahead of the expiring import tax reduction, Kleist said.

 

There have been visible signs of increased Chinese buying, with daily reports of 100,000 ton purchases in the past week. Just Friday, USDA announced a daily export sale of 226,000 metric tonnes of US soy to China, which was separate from the weekly export sales data. That report data, for the week ended November 8, totalled 1.296 million tonnes, with China accounting for 916,400 tonnes.

 

China's soy buying is up 4.5 percent in the January through October time frame, said Kleist.

 

Chinese purchases no surprise

 

The Chinese buying is not a total surprise, because this is the season to buy US supplies, as harvest funnels fresh supplies into the cash pipeline, analysts said.

 

China typically overbuys US soy into early January as a hedge on South American production, said Tim Hannagan, analyst with Alaron Trading in Chicago.

 

China will buy enough to cover hand-to-mouth needs, and then buy additional inventories to guard against any production losses in South America, he said. Once Brazil's crop moves through its critical growth period of February without a scare, then you usually see China canceling unneeded previous purchases from the US, Hannagan, said.

 

South American soy crops typically are harvested in the late February to April time frame.

 

The Chinese buying has provided a new wrinkle for the current rise in the soy futures market, providing a fundamental spark to add to the bullish influence of outside inflationary markets.

 

The weak US dollar has been a driving force in commodity markets in general, with a world wide demand boom providing underlying support, analysts said. The buying from China represents strong economic growth, with improved standards of living increasing the countries demand for protein, analysts added.

 

With tightening US soy ending stock outlooks, strengthening global demand and uncertainties associated with 2008 US acreage and South American production, the market to trying to get to levels that will keep demand in check, but to this point China has not been deterred from its buying needs, traders said.

 

CBOT January soy futures are posting an intra day high of US$10.88 a bushel Friday, the highest level for a nearby contract on continuation charts since June 1988.