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China mulls importing soybean meal from Brazil as supply shortage bites

Highlights

China's soybean meal market set to remain tight though Q1 2023

But market cautious about currency, quality deteriorations risks of imports

Feed sector seen unlikely to import soybean meal even if allowed

  • Author
  • Melody Li    Melvin Kwok
  • Editor
  • Wendy Wells
  • Commodity
  • Agriculture Oil

China, the world's largest soybean meal producer and consumer, is considering allowing large-scale imports of Brazilian soybean meal amid an ongoing domestic shortage, but many market participants doubt crushers will import even if approval is granted.

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A fall in soybean cargoes since July has forced Chinese crushers to reduce activity sharply, with imports in the third quarter down 9.1% year on year, reducing soybean meal production and driving up spot soybean meal prices since August.

China's soybean imports in October were down 19% year on year at 4.14 million mt, General Administration of Customs data showed, the lowest October volume since 2014. As a result, spot soybean meal prices rose 5.6% month on month and the current spot price is up 61% from the same time last year.

While soybean imports are expected to rise in November and December to 7.5 million mt and 9.5 million mt respectively, around 1.5 million mt each month will need to be returned to China's state reserves, which some crushers have dipped into in a bid to alleviate shortages. This will lower the volume of imported soybeans available for soybean meal production.

Demand coverage for nearby shipments remains low as crushers buy hand-to-mouth, and the soybean meal market is expected to remain tight through Q1 2023, multiple sources said. Only 4.6 million mt of total open soybean demand of 6 million mt for December shipment had been covered as of Nov. 14, while coverage for January shipments was at 25%.

With no indications the market is willing increase open demand for December-January soybean shipments, downstream feed sectors are already concerned about the supply of soybean meal for delivery in March and April, a source at a major Chinese crusher said.

Import option

The shortage has prompted Chinese authorities to consider allowing large-scale soybean meal imports — just one cargo was recorded in 2021-22 — with Brazil the most likely supplier, following China's recent decision to open its markets to Brazilian corn imports.

The documentation process for soybean meal imports is underway and could be finalized soon, prompting discussion in the market over what impact the option would have on China's feed millers.

Chinese crushers said offers for Brazilian meal were already available for December shipments, which would likely arrive in China in February, after the Lunar New Year.

However, most market participants doubted China's feed sector would import soybean meal from Brazil if the option became available, saying feed millers were inexperienced in importing, futures pricing and foreign exchange hedging, and accustomed to purchasing soybean meal from local crushers in yuan and paying transport fees only from the crusher.

If they were to import Brazilian soybean meal, they would have to pay for cargoes in US dollars and transport costs from ports, which may involve more capital risks and costs than feed millers were able to manage, market sources said.

The shelf life of soybean meal is also short and shipments from Brazil to China increase the risk of quality deterioration, a soybean meal trader said.

The soybean meal that feed millers collect from local crushers is typically crushed within 1-3 months and stored in warehouses with dry conditions, while maritime transport could result in high moisture content in storage conditions that lead to quality deterioration, he added.

Shortage to ease

China's domestic soybean meal shortage is also expected to correct gradually over the first half of 2023, multiple sources said.

"The expected higher import volume in December would make sure the supply of soybean meal is relatively sufficient during the festival period of Lunar New Year," a Chinese trader said.

A Chinese crusher source said demand for soybean meal would weaken after the Lunar New Year as the slaughtering of hogs for the festivities would lower hog inventory, which would offset lower soybean imports in February and March.

"Animal raisers would be restocking hogs and poultry during March and April hence the feed demands will recover significantly at the end of Q2," another Chinese crusher said.

However, a third Chinese crusher source said crushers might be prompted to import soybean meal to sell to local feed millers if the import margin for soybean meal proved more competitive than the domestic crush margin for soybeans.

"There might be a chance that Chinese crushers consider importing meal from Brazil," she said.

That price arbitrage would only occur if soybeans were too expensive for China to import while soybean meal from Brazil was relatively cheaper due to high inventories or higher than expected crushing activities in Brazil, a Chinese trader said.

Both crusher and trader sources did not expect this would occur in the near term.

Little regional impact

Regional feed millers were also unfazed by the prospect of China potentially importing Brazilian soybean meal.

"We understand that China entering to buy [Brazilian soybean meal] could shake the market, but we do not see the market behaving as such yet," a feed procurement manager in Indonesia said.

Southeast Asia is a key destination for South American soybean meal, with the biggest regional importer Indonesia buying more than 2 million mt/year from Brazil for its poultry industry.

Vietnam also imports from Brazil, although Argentina supplies about 60% of its 5.2 million mt/year of soybean meal imports.

"Only the major feed millers take [Brazilian soybean meal] for the higher crude protein content, the rest, we prefer to import from Argentina, so it is not going to affect us a lot," a Vietnam-based trader said.