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Published May 29, 2012, 08:42 AM

China's soybean situation

Soybean export sales were in the middle of the range of estimates. Palm oil prices firmed up in Malaysia after a recent string of lower prices. The trade is still dealing with rumors of cancellations, but no confirmations. The Inspection and Quarantine Department in southern China at the port of Guangxi has said that it discovered a recent cargo of soybeans from Brazil contained live worms. The cargo was approved for offloading, and there is no word yet on how the government intends to deal with the trader or Brazil.

Soybean export sales were in the middle of the range of estimates. Palm oil prices firmed up in Malaysia after a recent string of lower prices. The trade is still dealing with rumors of cancellations, but no confirmations.

The Inspection and Quarantine Department in southern China at the port of Guangxi has said that it discovered a recent cargo of soybeans from Brazil contained live worms. The cargo was approved for offloading, and there is no word yet on how the government intends to deal with the trader or Brazil. The port took in 1.2 million metric tons or 44.1 million bushels of soybeans during the first quarter of the year that did not totally pass inspection.

News wires carried word that Chinese importers were defaulting on iron ore and coal cargoes and that news, along with the dire financial situation in Europe, helped to pressure commodity prices. There continued to be talk about Brazilian soybean cargoes that had been canceled because crush margins are turning negative, costing processors about 100 Chinese yuan ($15.76) on every metric ton crushed at current rates. This doesn’t make a lot of sense for state-owned buyers. Sources tell me that local Chinese indicate that larger crushers’ margins have returned to break-even levels, rather than dropping into the red. State-owned enterprise (SOE) imports will be sold at cut-rate prices to make lousy margins plaguing non-SOEs turn positive. That is, if those non-SOEs are large enough to participate in auctions. Therefore, if crushing margins are the reason for cancelations, they likely are limited to small and mid-sized SOEs.

Canceling South American soybeans would make more sense for Chinese importers if time and or/quality constraints are the underlying issues. The SOEs can be picky about quality and demand more volume.

I think there is little reason to think that China has sufficient stocks in supply to address domestic demand, or that domestic producers will turn out a crop that is acceptable in volume or quality. Note: neither of which it has happened since 2006.

Financing is another problem that seems to be surfacing. The financing process involves importing beans to Hong Kong, after which the trading firm makes application for a bank letter of credit. The soybeans then are sold as quickly as possible, with a little bit of margin (30 percent). Traders are able to obtain financing in this manner because trade financing is not intended to make up any difference that might arise from currency appreciation. This allows beans to be sold below domestic prices in order to obtain funding, which has affected local market prices. Since the beginning of May and more than once, Chinese spot and futures prices have turned lower, giving greater rise to this variety of financing. One of my futures company sources indicated that recently there has been some tightening in commodity trade financing, but it is difficult for banks and state regulators to completely halt the practice.

As of May 24, Chinese trade sources indicated that they could not confirm soybean cargo cancelations. One thing appears certain: the recent rumors have a positive effect for end-users.

Sue Martin of Ag & Investment Services Inc. in Webster City, Iowa, can be reached at (800) 527-0051, e-mail ag_invst@wmtel.net. This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances as an offer to sell or a solicitation to buy or trade any commodities or securities herein named. Futures and optioning involves substantial risk of loss and may not be suitable for everyone.

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