Increased Chinese Demand Inflating Soybean Prices

on Sep 12, 2012
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China, the biggest buyer and consumer of soybeans, has upped its imports of the oilseed to meet the growing demand resulting from feeding its expanding dairy herd. Soybean prices rose on Wednesday, 29 August for the second time in three sessions, while corn declined. The protein-rich beans rose 3.5 percent on Tuesday for November delivery and finished at $17.225 per bushel. This year, China has been buying on average five million tonnes per month and has ordered an additional 100,000 tonnes for delivery after 1 September.

“China continues to buy U.S. soybeans,” said Gregg Hunt, a market analyst and broker at Archer Financial Services Inc. “For China, it’s pay up or do without. Prices will keep climbing until demand slows.”
!m[](/uploads/story/341/thumbs/pic1_inline.png)According to the US Department of Agriculture, US export sales of soybeans in the year starting from 1 September have risen by 53 percent to record highs of 16.8 million tons. Despite the increase, China may yet need to cut its imports by around five per cent in the period from September to February because US production has been damaged by the drought ravaging the mid-west cornbelt and is expected to decrease by 12 percent.

Jason Ward, Northstar commodity analyst, said that at the pace China was buying up US soybeans, supply will be depleted by February. From then on South American farmers will shoulder the responsibility of planting a large enough crop to help replenish global supply.
China’s food situation has changed significantly because of rising average incomes and broad economic progress. Although state media assures there is more than enough domestic production of rice and wheat to avoid a food crisis, rising prices are enough to cause serious resentment among the population. Every kilo of pork requires 12 kilos of soybeans in order to fatten China’s favourite meat to a slaughter-appropriate weight.

With inflated global grain prices, pork and vegetables are bound to rise sharply and rising food prices will erode the efforts going into improving the living standards of the lower-income end of the middle class. The household budget for food will eat into discretionary spending and might even push some families back into effective poverty. The regime won’t have forgotten that it was surging food prices which initially brought demonstrators onto Tiananmen Square in 1989. In China, prices are something the public blames directly on the central government, instead of the usual scapegoat –corrupt local officials.

Even with the decreased supply however, investors seemingly remain wary of taking new positions, doubtless recalling soybean futures last year falling by 16.7 percent and corn prices by 14.6 percent, despite harvests which were below expectations.
“I think it is a case of harvest pressure starting and a bull market that is a little tired,” said Bob Utterback of Utterback Marketing Services, a brokerage for farmers. “We know that supplies are reduced. You just had the culmination of too many longs in the market.”
Meanwhile, new-crop wheat barely changed at $8.76 after closing on 29 August at 0.65 percent down on the previous day. December corn remained flat at 7.95-1/4 per bushel after a 0.66 percent drop on Tuesday.

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