October 28, 2008

China to support oil enterprises to set up commercial inventory of soy



On October 20, the National Development and Reform Commission (NDRC) announced to purchase 1.5 million tonnes of soy at a price of RMB3.7/kg for reserve.


This boosted the spot price of soy in Northeast China by a big margin for two days running. The specific purchase distribution is: one million tonnes in Heilongjiang, 60,000 tonnes in Liaoning, 210,000 tonnes in Jilin, and 230,000 tonnes in Inner Mongolia. The purchase may start at the end of October. This is the first time for China to purchase to establish a central soy reserve.


The soy price has dropped continually recently, and the purchase price of soy in Northeast China is obviously lower than the expectation of farmers, and farmers are reluctant to sell. Farmers generally expect that the purchase price should be at least above RMB4/kg.


Though the spot price of soy has risen for two days running after the announcement of the reserve policy, the futures price has dropped by a large margin in two trading days in succession, which may dwarf the effect of the reserve policy. Due to a serious slump of the futures price of soy, Dalian Commodity Exchange has completely forbidden delivery of No. 1 import soy.


As China's soy output has risen by 37.5 percent this year, the State is very likely to increase the 1.5-million-tonnes reserve, and expand the reserve scale, not by the way of a central reserve, but by adopting a policy to support State-owned oil enterprises to establish commercial reserves. Though the RMB3.7/kg purchase price is higher than the market price, it is only RMB0.1/kg higher than the growing cost of farmers, and farmers may still be reluctant to sell at that price.


Meanwhile, soy imports are of low cost, and oil processing enterprises may purchase soy from abroad at low prices and then sell to the central reserve. Thus, by granting financial support for State-owned enterprises to establish commercial reserves of soy may effectively block imported soy from flowing into the central reserve, and protect the interests of farmers.


The "Proposals on Promoting Healthy Development of Soy Processing Industry" issued by NDRC on September 3 clearly stipulates that China will encourage large State-owned grain and oil processing enterprises to moderately increase the commercial reserve of soy, and the State will appoint specific reserve enterprises and the number of the enterprises by way of inviting bids.


RMB1 = US$0.1462 (October 28, 2008)