The July-September quarter is traditionally a soft period for U.S. soybean exports as the world’s top buyers of the oilseed typically divert their buying interest to South American suppliers while the U.S. crop rounds out the growing season.
But the shortage of supplies in Brazil and Argentina following this year’s drought in that region has forced the world’s top buyer China to start the current quarter with a six-year-high purchase of U.S. soybeans for the month of July and show continued solid demand so far in August.
Record high domestic soy prices suggest China may have further import buying to do in the weeks ahead, and should that buying occur amid fresh fears of potential U.S. crop shortages, could prove enough to push U.S. soy prices beyond the $20 per bushel mark.
Scraping the barrel
The primary factor underpinning the soybean price in recent months has been the fact that supplies of the crop have dwindled sharply following steep production losses in both South America and the U.S. — the top exporting regions of the crop — just as global consumption of soybeans hit record heights.
Large end-users such as China were somewhat forewarned of and prepared for the prevailing supply tightness after having tracked the drought-hit South American growing season carefully throughout late 2011 and into 2012.
But with the subsequent U.S. crop also getting hit by crop-threatening growing conditions, soybean buyers are starting to grow concerned about the diminishing reserves of the crop.
So far China and other major importers have not started to deviate too much from normal purchasing patterns in terms of export market activity, as top suppliers Brazil and Argentina theoretically remain ‘open for business.’
Indeed, China’s total soybean imports for the month of July were at their highest level since June of 2010 to confirm that supplies were indeed still available for those willing to pay the prevailing price.
However, there have been some subtle adjustments in China’s soy purchasing patterns that will be worth closer inspection in the weeks ahead after total soy imports from South America fell short of previous highs for the month of July just as imports from the U.S. hit a multi-year high for that month.
Indeed, Chinese imports from the U.S. in July were more than 10 times larger than for the same period in both 2011 and 2010, revealing that Chinese purchasers were forced to break with recent traditions in order to secure the desired amount of soy coverage last month.
And given that anecdotal evidence suggests South American soy supplies have declined further in recent weeks on additional Chinese purchases and domestic use, a further uptick in Chinese buying from the U.S. looks likely in the weeks ahead.
Coming to America
Indeed, there is evidence that Chinese traders have already picked up the pace of purchases from the U.S. in recent weeks, and are closing in on the record-setting levels of 2011 over the final weeks of the 2011/12 marketing season.
It will be several more weeks before the official commodity import tallies for the month of August are known, but in the interim the usual weekly crop export sales reports will be closely followed for signs of continued strength in Chinese demand.
Some commodity market analysts are projecting that Chinese soy purchases from the U.S. and elsewhere are bound to slow over the coming weeks in response to prevailing high global prices.
But as high as the export price tags may be from origins such as Argentina, Brazil and the U.S., they remain below the domestic price of soybeans for many users within China, often by more than $100 per tonne.
And these high domestic prices prevail despite a recent record-large sale of Chinese government soybean reserves to domestic soy processors. The reserve program is part of an initiative designed to fend off inflation in food and feed staples, and is centred on the notion that state-level traders go to the export market to acquire and build inventories of key consumer and industrial crops which can then be sold into the domestic arena in order to dampen interior price rises of those commodities.
But it is clear from the inexorable climb in interior soy prices that such sales are so far having only a negligible effect at best.
Further, the fact that the recent record weekly sale of more than 400,000 tonnes has already been made ensures that Chinese traders will now have to replenish those reserves in addition to conducting their usual hand-to-mouth purchasing procedures.
As a result, additional strong Chinese interest in U.S soybean supplies looks likely in the weeks ahead, and could well prove to be the catalyst that fuels U.S. soy prices deeper into uncharted territory and potentially beyond the $20 mark.
Gavin Maguire is a Reuters market analyst. The views expressed are his own.