FBA Issue 22: September / October 2008
Perspective: Soymeal - A broken rally, followed by a fork in the road


by Ann ZHANG

Following CBOT market price paths, soymeal prices peaked at RMB4,750/tonne in early July and then plunged by some 11 percent at the month's end. Earlier, between May and July, China's soymeal market entered an unexpected bull run. From RMB3,600/tonne in early May, soymeal prices surged time and again to new record levels before turning downwards in early July. In total, the rally registered a total gain of 32 percent or some RMB1,150/tonne.


Several factors fuelled the price hikes during that period. In Argentina, the world's third largest soy producer and main exporter, farmers went on a strike from March to July against the government's decision to raise soy export tariffs. The result was Argentina's soy exports were disrupted. Then, when soy buyers turned to the US for supplies, June's floods in the American midwest postponed soy seeding and reduced this year's expected harvest. CBOT soy prices responded by rallying to historic highs.


Domestically, strong soymeal demand from China's recovering livestock industry laid the foundation for higher prices. With CBOT soy skyrocketing and oil prices pushing up freight charges, China crushers' production costs increased tremendously. With soy oil prices staying weak, crushers compensated by raising soymeal prices in order to maintain profits. 


Meanwhile, soaring soymeal prices triggered substitution effects of other protein meals, pushing up both their demand and prices. Compared to May, average prices of soymeal and rapeseed meal in July rose by 22 percent while cottonseed meal surged by 37% percent and fishmeal 7 respectively.


Early July's price plateus occurred after Argentine farmers reached a consensus with the government--the government gave in and called off the tariff increment. In addition to ensuring supplies, the lower tarrif reduced expected prices on its own. Immediately, soy supply tension in the international market eased off. Adding to the good news was favourable July weather in American soy growing regions. When crude oil prices finally weakened after a long rally, it added to the downward price pressure.


In China, soymeal prices softened in tandem amid lower production costs. Moreover, livestock inventories had dwindled as rearing profits were eroded by the soaring feed costs. Consequently, demand for soymeal went on a slide. Soymeal prices fell by 11 percent or RMB500 to fall to RMB4,250/tonne from its peak in early July.


Looking ahead, should the US experience fair weather as predicted, near-term soy prices are likely to stay around current levels. –Downward movement is limited by transport, farm labour and fertiliser costs. They have risen by 50 to several hundred percent, thereby raising soy's price floor.


Should however, the American harvest be disappointing or shipments be disrupted by unexpected factors, prices could rally yet again, even in the fact of modest demand growth.
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