October 28 2003

 

 

Is the Bull Market of Soybean in China Entering Its Final Stage?

 

An eFeedLink Exclusive Report

 

Dalian Soybean futures prices have risen at an astonishing speed, especially after China's National Day holidays in early October. The market has hit the highest limit for three consecutive days and has risen by over 300 points. The overall market situation continued to be bullish. Market participants are asking how long will this rising trend of soybean market in China continue. To answer this question, the following factors should be considered:

 

I.  Domestic Spot Soybean Is in Short Supply and Seasonal Pressure No Longer Exists

    

In October, local newly-harvested soybeans deals are conducted in centralized purchases and sales. In general, as a result of sharp seasonal increase in market supply, the prices of locally produced soybean and its products should be on the a downward trend. However, the situation of soybean market in China this year is very differentdifferent. Instead of declining, the soybean market advances, and has reached highest limit for consecutive days. In addition, the rise of the prices of soymeal and soyoil also provided an impetus for the price hikes of soybean.

                                          

As a result, soybean market in China has advanced strongly and seasonal pressure no longer exists. This is due to the reduction in output of Chinese soybean this year, and thereby the resultant keen competition in the newly-harvested soybean acquisition procurement market. Many soyoil producers and spot traders have sent personnel to production areas with a specific mission tofor  purchasee soybeans. Some spot traders and soyoil producers are purchasing soybean in spite of the quality and high water content. This shows the great impact of spot market on soyoil production.                

 

As the profit of soybean crushing is relatively high at present and its prospect is generally expected to be promising, oil factories and distributors in China have been particularly enthusiastic about purchasing soybean this year. It is reported that numerous producers have been actively purchasing soybean in the northeastern regions of China. There is a diversified pool of main buyers. The biggest increase in purchase quantity came from oil mills located in the south.

  

As a result, the purchase prices of soybean have risen continuously. At present, the purchasing prices of soybean in Heilongjiang area are as high as RMB 2900/ton, while its average price on September 28 was only RMB 2300/ton. This has become the real motive driving the continuous rise of the market prices of Dalian Soybean and a forecast of a bullish market for 2004.

 

II. The Report by United States Department of Agriculture Changes the Demand-and-Supply Balance of Soybean                 

 

After issuing releasing the report on an active supply and demand market for the month of August and September, the October report released by United States Department of Agriculture (USDA) on October 10 has once again added more momentum to drive CBOT soybean market  prices up continuously.. In the report, USDA cut down the US soybean output by a big margin from 2.643 billion bushels in the previous month to 2.468 billion bushels (67.20 million tons). This is the lowest output in the past seven years and far lower than the level of 2.578 billion bushels, which was generally expected by the market before the issue releasing of the report.

 

USDA has reduced the total output, per unit area yield, stockpiles of soybean for three consecutive months. The reports changed the demand-and-supply balance of soybean market, which has resulted in the soaring prices of CBOT soybean futures and laid the foundation for the big bull market this year. The bullish factors supporting the price of futures have remained unchanged. The position of investment funds is still net long, which indicates long-term dealers are still dominating the market. The upbeat mood of CBOT soybean market is unlikely to change in the near future, and there is still some room for advancing.

 

III. Actions of Big Dealers  

 

Take Contract A401 as an example. The highest long position of this contract on September 23 was 0.44 million lots and its price was at the level of RMB 2720. After the market broke through upward on September 25, the market apparently reduced long position. By October 10, the long position of Contract A401 was 272008.

 

The overall market turnover apparently increased in this period, which indicated big bulls and bears both had the intention of closing position. The long position of Contract A401 decreased by 37.3%. It became the contract whose long position decreased by the biggest margin in soybean market. The long position of the overall market also decreased by 33%. A large quantity of funds invested in futures flowed out of the market. The big bulls and bears had basically covered their position in this period.

 

Under the influence of a strongly bullish CBOT soybean market, the market advanced with very small turnover after October. After the stock exchange forced the closing of positions on October 15, the long position of the whole Dalian soybean market has been less than 0.4 million lots. As Dalian soybean market lacks the participation of big dealers, the momentum for market advancing will apparently weaken with the reduction of closed position.

 

IV. Conclusion

      

The continual advance of CBOT soybean market is the main reason for the price hikes of Dalian soybean. Besides, the spot supply in Chinese market is in a tight situation, which caused the market to stay bullish and accelerated market advances.

 

Undoubtedly, a market without the participation of big dealers will not be as strong and have very limited room for fluctuation. New market operation will start in the near future, awaiting the participation of new big dealers. As a consequence, market analysts are forecasting that Dalian soybean might have entered the final stage of its bull market.