March 3, 2005
China: Strategies for feed millers in the face of surging soymeal prices

An eFeedLink® Exclusive Report


For the two weeks since the end of the Spring Festival holiday, China's soymeal prices have continued to surge on a daily basis, with some regions having accumulated gains of RMB300-400/tonne thus far.


As of March 1, 43-percent protein soymeal in Liaoning was trading at between 2,600-2,650/tonne, up by RMB300-350/tonne compared with prices two weeks earlier. In the Huabei region, soymeal prices climbed RMB400 to RMB2,700/tonne. In Shandong and Jiangsu, soymeal prices were standing at RMB2,700-2,750/tonne and RMB2,780/tonne, up by RMB350-400 and RMB400 respectively. In Guangdong, soymeal prices were up by RMB400 at RMB2,850/tonne.


The short time span within which soymeal prices recorded such big gains was beyond market expectations. How should the feed industry react to such a hike in prices? What is the near-term trajectory for prices?



1.   CBOT Prices up on the back of hot weather conditions in Brazil


For the past month, Brazilian weather conditions have been the focus of CBOT and the driving force behind the hike in the prices of soybean futures. The persistently hot weather conditions in Brazil's southern regions are extremely adverse for the seeding of soybeans and the irrigation of soybean-planted lands. Consequently, many commodities organisations have lowered their output forecast for Brazilian soybeans.


The latest announcement by FecoAgro, located in the state of Rio Grande Do Sul in southern Brazil has revised downwards its soybean output forecast for the region by 57% from 9.4 million tonnes to 4.06 million tonnes. AgRural, Brazil's agricultural consultative council, has lowered its soybean output for the country from 62.6 million to 60 million tonnes, and there could be further downward revisions in the months ahead.


Currently, the irrigating period for soybean-cultivated lands in southern Brazil is nearing the end and the dry weather conditions will only have limited impact on single cropping areas. By then, the speculative atmosphere in CBOT will diminish. With current technical indicators pointing to an "overbought" situation, fund managers might close their positions and near-term soybean prices in CBOT could remain volatile as it trades in a narrower range.



2.   Supply and demand for soymeal in China seen to be stable in March


The latest cargo statistics from US ports show that around 1.2-1.3 million tonnes of soybeans will arrive in China in March. It is estimated that China's March soybean imports will range from 1.3-1.4 million tonnes. Although this figure is lower that the monthly average imported soybean crushing volume of between 1.7 to 1.8 million tonnes, the increased slaughtering of farm animals during the Spring Festival should result in lower demand for feed and analysts expect China's soymeal consumption to fall by 30 percent in the post-Spring Festival period.


Besides, locally-produced soybeans have begun to hit the markets and major crushers in northern China have started procuring soybeans in Heilongjiang. Growers there are still holding to about half of their soybean output. With lower crushing volume and reduced consumption of soymeal, analysts expect a balanced supply and demand relationship to emerge in March.



3.   Rising soybean prices to drive up soymeal production cost


Seventy percent of China's soybean for crushing is met by imports. Given this situation, CBOT soybean prices are an important cost factor for domestic crushers. In the past few days, prices of CBOT soybean futures have risen above the psychological level of 600 US cents per bushel. At this price, China's soybean crushers' import costs will be around RMB3050/tonne, up RMB400 compared with pre-Spring Festival prices. This rise in production costs could push up prices of soymeal and soy oil as well as other soy-related downstream products.


Meanwhile, prices of soy oil have remained sluggish. Current prices of Grade-4 soy oil are still hovering at the low of around RMB5,800/tonne. It seems now that crushers could only passed on the high cost of production to soymeal buyers, as evident from the daily rises in soymeal prices.


In conclusion, analysts felt that once the "weather factor" ceased to be of speculative interest in CBOT, and if this is combined with a lack of fresh leads, soybean futures prices will slip back and fluctuate within a tight range. If foreign funds were to withdraw from CBOT, China's soymeal prices will also lose its rising momentum and start to head south, but analysts mentioned that the magnitude of decline would not be too great. On this note, analysts suggest that feed millers should adopt a cautious approach towards soymeal stock replenishment and those who have adequate stockpiles should refrain from making procurements just as yet. They should adopt a wait-and-see approach, focusing on prices in the international markets and wait for factors of uncertainty to recede before committing to any purchase exercise.