Soybean target price policy trial-tested for the first time, mechanism still needs improvement
Soybeans are closely tied to people's daily lives and offer considerable economic benefits. Since joining the WTO, China, once a major soybean producer, has become a “fertile market” for foreign soybeans, especially American ones, and some foreign companies have gained de facto pricing power over soybean purchases. Moreover, when faced with genetically modified soybeans, domestic growers sometimes “have no choice but to use them.”
When the industrial chain relies mainly on imported soybeans, some foreign companies suppress purchase prices on the one hand while “sharply driving up” soybean oil prices on the other, ultimately causing the planting area in China's main soybean-producing regions to shrink year after year, making even more room for imported soybeans.
Faced with pressure and challenges, China launched a pilot reform of target prices for soybeans and other agricultural products. Now, in the second year of the reform, what improvements have been seen in the main soybean-producing regions? How will the target price further play its role?
Price inversion, rising usage
Recently, soybean oil in the futures market has fluctuated, while soybean meal remains sluggish; “strong oil, weak meal” is an important feature of the current market. Over a somewhat longer market cycle, oil and meal prices have been trending downward. Relevant market data show that the soybean oil index fell from 10,000 points in September 2012 to 5,700 points recently, a drop of about 43%; the soybean meal index fell from 4,200 points in September 2012 to 2,500 points recently, a drop of about 40%.
Wang Xiaoyu, deputy secretary-general of the Heilongjiang Soybean Association, told reporters that the main reasons for the above situation are oversupply and weakening international market prices. At present, oversupply mainly stems from three aspects:
First, excessive imports. Excessive imports are not driven by consumer demand. Large international trade and processing enterprises no longer rely solely on meeting consumer demand to make money; instead, they earn profits through financial derivatives, international trade price differentials, and futures market hedging. Soybeans and related bulk commodities have long since become financial instruments. For example, if an enterprise buys a shipload of soybeans in the United States, it can simultaneously sell soybean oil and soybean meal products in the futures market according to the principle of cost plus profit, turning the spot market into a supplementary profit channel. In recent years, China has had an obvious problem of excessive imports: in 2014, China's soybean output was 12 million tons, imports of genetically modified soybeans were 71.4 million tons, and usage was 83.4 million tons, accounting for 30.89% of the global consumption of 270 million tons, while China's population accounted for only 19.1% of the world total at the same time. On this basis, China should consume 51.57 million tons of soybeans, meaning 31.83 million tons were over-imported. Even if, according to the dietary characteristics of the Chinese public, 6 million tons of soybean food consumption are excluded, imports still exceeded demand by 25.83 million tons.
Second, overcapacity. Overcapacity brings excessive processing demand. Before 1996, China's soybean processing capacity was around 10 million tons, and by the end of 2014 it had exceeded 140 million tons. The soybean market is highly internationalized, and “sharp rises and falls” can quickly generate profits. As long as profit is seen, new capacity will import large quantities to start production, and sell oil and meal products to speculators through the futures market to earn profits.
Third, commercial inventories. Newly built commercial transit inventories should be taken seriously. Since international large chain supermarkets such as Walmart and Carrefour entered China in the 1990s, China's large wholesale markets, chain supermarkets, convenience stores, and warehouse stores have developed rapidly. These newly built markets need not only stock on the shelves but also transit inventory. Residents' consumer demand is stable, but each new supermarket or store generates corresponding inventory. According to relevant statistical conventions, such inventory is classified under consumer demand during periods of rapid economic development, but when market growth stabilizes or declines, it “becomes” supply pressure. If the warehouses and shelves cannot hold it all, it is promoted at low prices outside the supermarket doors.
As for the weakening international market prices, the main reason is increased soybean supply from the Americas. At the same time, factors such as stable domestic consumer demand, excess processing capacity, and demand saturation also react on the international market. In addition, there is also the impact of consumers' concerns about the safety of genetically modified foods.
However, does weakening prices really mean that the downstream soybean industry is also weakening? What impact does weakening prices have on current soybean prices? On this point, Wang Xiaoyu admitted frankly that whether the downstream soybean industry is weakening along with it is still being analyzed by the Heilongjiang Soybean Association.
In the domestic market, soybean prices remain “inverted at home and abroad”——the port distribution price of imported soybeans currently averages 3,000 yuan/ton, while the price of domestically produced soybeans in Heilongjiang is currently 4,000 yuan/ton. It should be noted that demand for domestically produced soybeans has begun to improve. “The amount of soybeans produced in Heilongjiang that is being used is indeed increasing.” Wang Xiaoyu said that in 2015, consumption in Heilongjiang's main producing areas was better than in previous years.
The positive trend for domestically produced soybeans is beginning to emerge, and it is closely related to the target price reform.
In the face of the recent sluggish soybean prices, Wang Xiaoyu said this may not necessarily be a bad thing. “From the perspective of developing the soybean industry, our association prefers domestic and imported soybeans to compete at the same price. In this way, processing enterprises have lower production costs, and traders also have lower operating costs, which helps soybeans ‘step out’ of Heilongjiang. And even if farmers ‘sell soybeans at a low price,’ they do not lose money——because the target price subsidy has already made up the price difference to farmers.”
Regarding the current soybean prices in producing areas, Wang Xiaoyu believes they are somewhat “neither high nor low”——after the soybean target price reform, soybean prices in producing areas are neither “high” enough to meet soybean farmers' income expectations, nor higher than the target price issued by the state, nor “low” enough to reach a price level comparable to imported genetically modified soybeans. “When price collection ended at the end of March this year, soybean prices in producing areas fell rapidly to 3,800 yuan/ton. It even reappeared that ‘subsidies are not enough, enterprises do not start production.’” Why this situation occurs is still inconclusive, and all parties are still actively studying it.