Record Soybean Harvest Fails to Reverse Declining Legume Prices

“An extra harvest of three to five dou” was originally a sight that delighted farmers, but in a year of abundant production it became the straw that bent agricultural prices downward.

In the golden autumn season, a spell of rainy weather during the soybean harvest on the other side of the ocean brought a small rebound in domestic and international soybean futures and soybean oil futures. But after the wind and rain came bright sunshine, and the fields once again filled with the busy scene of harvesting, which sent domestic and international soybean and soybean oil futures plunging yesterday, with domestic soybean oil futures hitting a new low during the session since mid-October 2006. It was truly a case of “the sun rises in the east while rain falls in the west.”

Soybean oil futures hit a nearly 8-year low

During the first three weeks from October 1 to October 17, news came from the United States that rainy weather was affecting the soybean harvest, and CBOT soybean futures rebounded by 4.44% during that period, while domestic soybean meal and soybean oil futures also showed signs of stabilizing and rebounding after a long decline. But soon the weather in the United States suddenly turned clear, the producing areas were bathed in bright sunshine, and the legume futures market was instead shrouded in gloom.

CBOT soybean futures fell to their lowest level in nearly a week in Monday's electronic session, while the main 1501 contract of domestic soybean oil futures fell yesterday by 126 yuan/ton, or 2.16%, to 5,708 yuan/ton, touching a low of 5,696 yuan/ton during the session, a new low since October 20, 2006.

Ole Houe, an analyst at Sydney-based brokerage IKON Commodities, said the weather looks very good and will help U.S. farmers speed up the harvest. Last week's gains were entirely driven by delayed U.S. harvesting, and it would not be surprising if prices fell for most of this week.

“Recently, improved weather in the U.S. Midwest has been favorable for the U.S. soybean harvest. Under this influence, U.S. soybeans and U.S. soybean oil have overall maintained a volatile and weak trend, while high inventories and weak demand in the domestic oils market remain important factors restraining a rise in prices.” pointed out Wu Zhengxing, an analyst at Huishang Futures.

Zhou Lingling, an analyst at Galaxy Futures, said that supported by a slightly bullish USDA report, oils rebounded modestly for two days early last week, but the indisputable fact is that record U.S. soybean production is about to come onto the market. According to USDA estimate data in October, U.S. soybean production in 2014/2015 will reach 106.87 million tons, an increase of 15.48 million tons over last year, roughly equivalent to China's imports for two and a half months. Combined with the concentrated market arrival of U.S. corn and other crops, this will inevitably place considerable pressure on U.S. soybean storage capacity and logistics and transportation capacity. If warehouse capacity is insufficient, farmers will be eager to ship goods, which will in turn place considerable pressure on market prices.

Chinese demand unlikely to be bullish

In September and October, as U.S. soybeans came onto the market one after another, the overall increase in U.S. soybean production was already settled, and the newly planted soybean area in South America also weighed on forward oils prices. According to the Brazilian National Supply Company (Conab), Brazil's soybean planting area in 2014 was 30.6-31.87 million hectares, an increase of 430,000-1.7 million hectares over last year. The Buenos Aires Grain Exchange estimated Argentina's soybean planting area at 20.6 million hectares, an increase of 250,000 hectares over last year.

With increased supply already a foregone conclusion, Chinese demand has become the key to determining the trend of the oils market. So can Chinese demand boost the soybean oil market?

“Looking back at customs statistics for the past five years, China's monthly soybean imports often reach their lowest point of the year in September and October. This is mainly due to the fact that terminal consumer demand for oils has far from stabilized, and oil mills and traders also lack stocking demand for holidays.” said Li Qing, an analyst at Essence Futures. At present, crushing margins for oil mills in China's coastal areas are around 100 yuan per ton, which is relatively thin, while soybean oil inventories remain large, downstream manufacturers basically have no willingness to stockpile, and oil mills have entered a long process of “destocking.”

At present, China's soybean oil inventories remain high. According to data from Tianxia Liangcang, as of October 17, China's commercial soybean oil inventories were about 1.38 million tons, far higher than 1.03 million tons in the same period last year and close to the record high of 1.45 million tons. Port soybean supply, however, remains relatively ample. “Later, as hog farming enters its peak season, demand for soybean meal will gradually increase, and the operating rate of oil mills will also rise, triggering an increase in commercial soybean oil inventories. However, because winter is the off-season for palm oil consumption, soybean oil will replace part of palm oil consumption, so the increase in soybean oil inventories may also be limited.” Zhou Lingling said.

In addition, the recent significant decline in international crude oil prices has also exerted spillover pressure on soybean oil prices. Based on current crude oil prices and without considering tax subsidies, producing biodiesel from soybean oil as a raw material in the United States incurs a loss of about 20%, and the theoretical loss margin has widened, indicating that the amount of soybean oil consumed by the biodiesel industry will be lower than previously expected.

Wei Lei, an analyst at Changjiang Futures, pointed out that at present crushing margins for imported soybeans in the Jiangsu area have again turned negative, and with oils destocking performing poorly, oil mills may continue to support soybean meal.

“Recently, both the hog-to-grain price ratio and hog inventories have warmed up, and feed and farming returns may be relatively more optimistic than oils. Considering oil mills' willingness to support meal and sell oil, we tend to believe that the oils fluctuation range will still shift downward.” Li Qing said.

Apart from soybean oil futures, analysts are also not optimistic about the subsequent trend of palm oil futures. At present, overall oils supply is loose. Under pressure from factors such as high inventories, oils spot prices have performed relatively weakly and have followed the futures market downward, with soybean oil falling by 30-100 yuan/ton and palm oil falling by 10-40 yuan/ton. At present, domestic factory soybean oil inventories remain at about 1.36 million tons, at a relatively high level. However, port palm oil inventories are 699,000 tons, maintained within a relatively stable supply-demand range, and palm oil has been relatively resistant to declines.

Wu Zhengxing pointed out that under the influence of the continuous sharp decline in international crude oil and the relative weakness of U.S. soybeans and U.S. soybean oil, the oils sector, including soybean oil and palm oil, may maintain weak fluctuations.