July 3, 2009

The seasonal post-summer increase in Chinese soy imports may fail to occur this year as China is likely to sell some of its inventories ahead of the autumn harvest.

 

While most grain traders remain upbeat on demand from the world's largest soy purchaser, slower procurement following the end of China's stockpiling campaign this week may be more prolonged and pronounced than anticipated.

 

An executive with a leading crusher in China said purchases for August and September shipments will be much smaller as crushers have already overbought earlier.

 

The stockpiling campaign forced processors to import additional cargoes, which tightened the global supplies and pushed benchmark soy prices on the Chicago Board of Trade (CBOT) to a nine-month high of US$12.91-¼ a bushel in June. The market is up 28 percent so far this year.

 

China's domestic oilseed industry has been speculating on the period government's supplies would reach the market, a factor that has weighed on Dalian soy futures in recent weeks.

 

However, analysts and traders said the domestic market was not yet ready to receive the government's stocks for at least two months due to the abundant inventories in China's ports and storage facilities and the reduction in processors' production.

 

After nine months of stockpiling, China's soy inventories are estimated between the range of five and seven million tonnes which fell short of the target of 7.25 million tonnes. However, taking into consideration of the imported supplies, China has an estimated 10 million tonnes of soy.

 

Crushers in coastal areas are not interested in state soy reserves as they have bought sufficient imported soy, said Gao Chunlai, an analyst with www.chinafeedonline.com, who tracks crushing activity in northern China. He added that many crushers could scale down production in July because of negative margins.

 

Meanwhile, the government has said soy reserves would be sold at a higher price than the RMB3,700/tonne (US$541.5) it paid to the farmers. With the current domestic price quoted at RMB3,600 (US$526.9), it means it will not be profitable for the government to sell its reserves now.

 

During the period of January-May, China bought 17.4 million tonnes of soy, an increase of 27.3 percent amid attractive crush margins and the shortage of domestic supplies.

 

As processors reduced their orders for the August and September shipments due to negative crushing margins, this could result in a supply deficit by September when the industry prepares for higher demand ahead of the national holidays and the winter season.

 

Analysts said this could be the right moment for Sinograin, the state agency which manages state reserves, to open its silos.

 

To date, traders said importers had booked around two million tonnes of soy for August shipment while imports in June and July are estimated to exceed eight million tonnes.

 

Every month, China requires around 3.5 million tonnes of soy which are processed into cooking oil and high-protein soymeal, used as an animal feed ingredient.

 

However, the demand for soymeal has slackened as there has been no growth in China's feed industry this year, compared with an average annual growth rate of 10-20 percent.