Why did soybean meal futures prices rebound against the trend when overall feed consumption was declining?

Recently, soybean meal prices followed the US market in a major rebound, and judging from soybean and soybean meal inventories, the massive arrivals of soybeans did not put much pressure on inventories. Therefore, looking only at protein prices, domestic demand seems to be doing quite well. Is that really the case?

First, looking at production data, based on forecasts from the Ministry of Agriculture's 180 key tracked enterprises, total national feed production in the first half of the year was 87.3 million tons, down 1.7% year-on-year, of which pig feed fell 7.1% year-on-year, poultry egg feed fell 3.4% year-on-year, and poultry meat feed fell 1.05% year-on-year.

Second, hog inventories remain on a downward trajectory, and demand can hardly be described as optimistic. The Ministry of Agriculture's May hog inventory data from 4,000 monitoring points showed that hog inventories fell 0.2% month-on-month and 9.80% year-on-year, breeding sow inventories fell 1.20% month-on-month and 15.50% year-on-year, and fattening pig inventories fell 0.08% month-on-month and 9.11% year-on-year. Even though hog and piglet prices have now rebounded, inventories have not recovered. The hog breeding cycle is relatively long, and it will still take time for restorative growth to appear.

Finally, corn prices fell sharply year-on-year, confirming weak demand. In 2014/2015, the state temporary reserve purchased 83.29 million tons of corn, 14.1 million tons more than in 2013/2014. The massive temporary reserve purchases failed to push corn prices higher and merely slowed the downward trend. As of July 8, the corn purchase price at feed mills in major producing areas was 2,301 yuan/ton, still down sharply by 190 yuan/ton year-on-year.

⟦NL> Since May 2014, the massive supply brought by a global soybean bumper crop has continuously pushed down soybean sales prices. As the cost of soybeans arriving at ports declined, domestic soybean meal prices also repeatedly hit new lows. At the start of 2014/2015, the market generally expected domestic soybean imports to reach 74 million tons; that expectation has now reached 78 million tons, up 11.9% from the same period last year. The market's focus began to shift to whether China could consume such a large volume of purchases and when crushers would finally face tanking storage. The market was shrouded in pessimism, but as time passed, expectations of storage tanking were repeatedly postponed. After the massive soybean arrivals, soybean inventories at ports and crushers were lower than in the same period last year. At the end of June, as US market weather speculation began, market sentiment started to turn bullish, and crushers' intention to support soybean meal became more obvious.

Survey information shows that demand did not improve; the root cause of the large increase in usage was an increase in the soybean meal inclusion ratio. Because the price ratio of soybean meal to miscellaneous meals and imported DDGS was at a historical low, feed enterprises raised the soybean meal inclusion ratio and lowered the inclusion ratio of miscellaneous meals. By variety, because pig feed has higher requirements for palatability and toxins, the inclusion of miscellaneous meals and corn by-products has always been low, so the increase in soybean meal in pig feed formulas can be ignored. The growth in soybean meal usage mainly came from increases in the soybean meal inclusion ratio in poultry feed and aquaculture feed formulas. Taking South China as an example, poultry feed often added 5-8% miscellaneous meals to reduce formula costs, and this has now been completely replaced by soybean meal. Substitution in aquaculture is even more obvious. In freshwater fish feed, the inclusion of rapeseed meal was often maintained at 20%-35%, but it has now fallen to about 15%, and some enterprises no longer use rapeseed meal at all. It is precisely because of its high cost-effectiveness that soybean meal has gradually replaced other protein raw materials. Substitution already occurred in 2014 and intensified in 2015.

Analyzing from the perspective of factors driving protein demand growth in China, before 2000, demand for meat, eggs, milk and other livestock products maintained double-digit rapid growth, while also driving the continuous expansion of livestock and poultry breeding scale, and protein feed demand grew rapidly along with it. After that, the growth rate of demand for meat, eggs, milk and other livestock products began to slow, and protein feed demand slowed overall, but differences among varieties began to appear. As the most important protein raw material, soybean meal's formula usage continued to rise, and its demand growth remained strong. Under the premise that total protein demand is slowing and the space for formula substitution is declining, soybean meal demand growth will also be restrained in the future.