Saturday, December 6, 2008

Soybeans: Too Much of a Good Thing?

Just a few months ago all the experts saw world food price inflation as a permanent fact of life. Now, following another record harvest and a big reversal in world commodity markets, China is struggling to keep commodity prices from falling.

China had a big soybean harvest this year and demand is soft, so prices are falling. In October the government announced plans to buy 1.5 million metric tons (mmt) of soybeans from northeastern provinces for central government reserves at a price of 3700 yuan/mt. Market prices are still a lot lower. As of Dec. 5, the market price of soybeans in Jiamusi, Heilongjiang Province's biggest soybean production area, was 3400 yuan/mt, 300 yuan below the support price.

Problem: imported soybeans cost only 3100 yuan/mt. Nobody wants to buy domestic soybeans.

On Dec. 3, the government reserve purchase amount was doubled to 3 mmt. (Corn reserve purchases were also doubled to 10mmt.)

Here are the numbers presented by the manager of a soybean crushing plant in Heilongjiang. He estimates soybean production in Heilongjiang is 7 mmt this year. Food use in the province is 380,000 mt, about 1.7 mmt are sent out to other provinces, and about 250,000 mt are retained as seed. That leaves a surplus of about 5 mmt that must be used for oil-crushing. Nobody wants these beans because imported beans are several hundred yuan cheaper. In the manager's estimation, the level of purchases announced by the government isn't enough to support prices. (To put this in perspective, the reserve purchases are about equal to a month's purchases of imported soybeans of 2-3 mmt.)

Chinese policymakers are desperate to keep soybean and grain prices up. First, they want to keep farmers happy. Second, they're worried that if prices crash, farmers will plant fewer soybeans next year.

A number of ideas to narrow the difference between domestic and imported beans are being tossed around by people in the industry. One idea is to raise the tariff on imported soybeans. Raising the tariff is not an option because as a WTO member, China's soybean tariff cannot be raised above its bound level of 3%. (China actually cut the tariff from 3% to 1% for the April-September period when they were worried about short domestic bean supplies.)

Another proposal involves a tax policy I don't quite follow. It seems to involve discounting the cost of beans when calculating a processor's value-added tax or sending rebates only to processors who use domestic soybeans. I don't understand how this works, but it sounds like it also illegal by WTO rules because it discriminates against imports.

Another proposal is to give subsidies to companies that process domestic soybeans. THere are rumors in the industry that the government has given such subsidies to state-owned companies including COFCO and "93 Oils." An operator of a private edible oil company complains that giving subsidies only to state-owned companies gives them an unfair advantage over private ones.

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