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Published December 14, 2010, 08:35 AM

Feeding China’s demand for oils

For months, market news has focused on China’s food inflation and the probable decimation of crops and livestock during the early droughts and floods that followed.

For months, market news has focused on China’s food inflation and the probable decimation of crops and livestock during the early droughts and floods that followed.

China’s official line has been that soybean import increases in 2009 and ’10 and 2010 and ’11 were intended to accommodate increased livestock feeding.

While that may be true to some degree, recent news is that some Chinese crushers have had to close because of lack of demand for soymeal.

After the floods of 2010, there has been a renewed need to rebuild herds in China, which should enhance demand for the protein. It would appear that crushers were crushing more soyoil. In fact, Beijing recently has put price controls on vegetable oil. I think vegetable oil is the only commodity for which China has imposed price controls, while on corn, China has limited the number of bidders for corn at auctions and how much and how long bidders can have supplies. Perhaps something else has happened to China’s vegetable oil processing industry.

Some time ago, China halted Argentine imports of soyoil — a decision that may have been based on purity concerns but easily could have been cleared up with more domestic Chinese processing.

There is word that soybeans are backing up at the ports. Normally, that would send soybean futures lower, but futures instead are moving higher. Soybeans have rallied through the Chinese harvest and have at worst remained steady in the cash market. Could this be a symptom of major need in China?

Chinatex is the third-largest oil processing company in China. As of the end of 2009, Chinatex oil processing was focused in Jiangsu, Guangdong and Shandong, and it has extended trade, processing, storage, logistics and sales of soybeans, vegetable seeds, corn and cooking oil.

In 2009, Chinatex imported 4.2 million metric tons of soybeans, making it the largest single importer in China, accounting for 10 percent of all soybeans imported into China. The vegetable oil processing capacity of its eight subsidiaries reached 220,000 metric tons per day and 6 million metric tons to 7 million metric tons per year.

In addition, Chinatex has a cooking oil refinery with a yearly capacity of 1.5 million metric tons. All of the soybeans Chinatex imports are processed by its companies.

Chinatex is a big deal, a state-owned agribusiness with its hub of operations in the middle of some of 2010’s worst floods and landslides.

Jiangsu was one of the first provinces to be hit with the worst floods and landslides. North of Jiangsu is Shandong, a major oilseed processing center. It also incurred significant losses caused by the flooding and landslides.

Given that China’s rail system runs only north and south, the landslides would explain the washouts of tracks that would make deliveries from Jilin and Heilongjian in the northeast into Jiangsu nearly impossible, and force shipments to be made by truck at much higher prices.

Since Jiangsu and Shandong are the two major centers for vegetable oil processing, this would explain the increases in cooking oil and other edible oil prices in recent months.

China’s appetite for vegetable oil is huge, and as infrastructure gets rebuilt in time, will demand wipe out the surplus of soymeal as livestock herds are rebuilt? I think food markets are going to see another good year in 2011.