Tuesday, March 10, 2009

Big Soybean Harvest In Storage

In 2007, China had a short soybean harvest. There was a severe drought in soybean areas of the northeast and a campaign to plant grain too area from soybeans (and rapeseed). Consequently, China's imports of soybeans and vegetable oil zoomed upward in 2007-08, contributing to soaring oilseed prices.

In 2008, China's soybean production bounced back. We thought this would reduce China's demand for imports this year, but the bigger harvest went into storage bins--not much of it made it into the market--and China continues to buy up soybeans.

World soybean prices started plummeting in the fall of 2008, just as the new harvest came in. Chinese officials were worried about keeping farmers' incomes up and preserving incentives to plant soybeans again in 2009, so they announced a support price for domestic soybeans well above the market price.

A chunk of domestic soybeans were bought for government reserves at the support price and stored in bins. They were too expensive to process, so they sit in the bins. Moreover, Chinese farmers had trouble selling their beans at the support price. A lot of them couldn't meet the quality standards for reserve purchases. No one wants to buy domestic soybeans that are more expensive than readily available imported beans. So one report from Heilongjiang Province says at least half of soybeans in the major producing area are still stored on farms.

The Grain Administration just announced a plan to ship corn and soybean reserves from its bulging warehouses in Heilongjiang and other northeastern provinces to other provinces. They have to do this because they ran out of space to store the reserves they've been buying up. Also, they probably have to get the grain/beans out of storage before they rot/mold.

Meanwhile, the big chinese harvest had no impact on the market. China continues importing soybeans at a torrid pace. Much of the Chinese harvest is in storage where it may rot if not dried or stored properly or feed rats and vermin. Thus, the Chinese support price is a highly wasteful policy that is also sending a false signal to the world market that China needs more soybeans than it actually does.

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