July 16, 2003


China Planning Auction Of 800,000 Tons Of Soybeans From State Reserves


China's plan to auction state soybean reserves will likely damp domestic soybean prices and help increase supply for small local crushers in the near term, amid hazy import rules, trade participants said Monday.


At the same time, however, the auction has been talked about for some time, and the impact on the local market may be minimal, they said.


"Currently, small crushers are running short of soybeans. The government may wish to increase supply to help (them) survive," an official at the trading department of Yellow Sea Grains & Oil Industry (Shandong) Co. told OsterDowJones.


"And, psychologically, the auction will help cool down high prices," even though 800,000 metric tons is far from enough to meet domestic demand in the short term, said the official.


State media reported earlier Monday that China plans to auction 800,000 tons of soybeans from state reserves. Futures Daily said this will be done in several grain and oil wholesale markets in the near future. As reported, soybean futures on the Dalian Commodity Exchange came under pressure following the news.


All nine soybean futures contracts on the DCE settled 4-26 yuan ($1=CNY8.28) lower at 0700 GMT Monday. The most heavily traded January 2004 contract fell CNY11/ton to end at CNY2,408/ton.


This came after news Friday that China will start to accept, at the end of July, applications for safety certificates to import soybeans containing genetically modified organisms, which will allow arrivals of foreign cargoes after Sept. 20.


Although there has been no official notice on the matter, officials from the Ministry of Agriculture had said earlier the country's strict interim rules on GMO imports would be extended to April 20, 2004, from Sept. 20 this year.


China has seen robust soybean demand this year, with total consumption in 2003 forecast around 34 million tons. With local production estimated to be only 16.5 million tons, the rest of the demand has to be met through imports or local stocks.


But some uncertainty over the GMO rules remains, especially pertaining to application procedures, and this has the potential to delay imports.


"First, there are some questions over the GMO extension. Second, people are also worried about the scarcity of supply in September and October," said Zhang Xiaoping, deputy country director of the American Soybean Association in Beijing, explaining the possible reasons for an auction.


Auction May Be Just Rotation Of State Reserves


On the other hand, the auction could just be a routine rotation of state reserves, as China needs to get rid of old stocks to make way for the new soybean harvest coming in September, said Zhang.


The government may not have any intention to depress the market by releasing old stocks, since with the upcoming harvest, they would want to ensure attractive selling prices for farmers, Zhang added.


"It (the auction) has been mentioned for some time - one or two months...Anyway, the volume (of 800,000 tons) is only one third of a month's imports," said a Beijing-based trader with a global commodities firm.


Participants said attention is still on China's imports. With soybean deliveries in the first half of the year already exceeding expectations, participants are anticipating some import restriction for the second half of 2003.


"Farmers' interest is still a very politically sensitive issue in China," said a director in Beijing with a local commodities firm. No matter how the GMO rules change, however, "we bet that China will let U.S. cargoes in...The U.S. is too crucial as a trading partner," said the director.


Chinese customs data show that China imported almost 7.7 million tons of soybeans in the January to May 2003 period, with over 6 million tons from the U.S. Imports in 2002 were 11.3 million tons, down 19% on year. The U.S. was the largest supplier, at 40%, followed by Brazil at 35% and Argentina at 25%.


The interim GMO import rules have been blamed for a decline in Sino-U.S. soy trade valued at US$1 billion in recent years.
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