The Soy Price Shock In The US Will Reverberate Across China

The Chicago Board of Trade soy futures hit a new record Sunday evening as attention now shifts from corn to soy. Traders are coming to the realization that soy supply may not last long enough to be replenished by crops from South America.

Bloomberg: “Corn was the story going into the crop tour and now soybeans are the story after leaving the fields this week,” Peter Meyer, a senior director of agriculture commodities at PIRA Energy Group in New York, said in an interview in Owatonna, Minnesota, after completing his sixth Pro Farmer tour. “Mother Nature shut down the soybean crop well before it reached its potential. The U.S. may run out of soybeans before the start of the South America harvests in February.”

Again, a number of analysts continue to argue that the North American drought should not have a significant impact on Asia. That is just not true. Some economists simply don't appreciate just how global agricultural markets have become.

Bloomberg: China, the world’s largest buyer and consumer, purchased 165,000 metric tons of soybeans and 55,000 tons of soybean oil from the U.S., the USDA reported yesterday. China may import a record 59.5 million tons of soybeans in the year that begins October 1, the agency said August 10.

World soybean supplies may shrink by 33 million to 35 million tons in September to February, compared with a year earlier, forcing China to reduce imports by 4 million tons, researcher Oil World said August 21.

Tight global supply of soy will translate into government subsidies and/or food inflation in China and elsewhere in Asia. Fear of food inflation is one of the reasons China has not been as aggressive with its stimulus programs in spite of slowing economy. Here is a quote from the LA Times that describes how these skyrocketing soy prices will reverberate across China.

LA Times: Construction laborer Yi Jichun has never heard of Illinois or Iowa. But the migrant worker's favorite comfort food comes straight out of the U.S. Midwest: soybean oil.

The world's biggest consumers of edible oils, Chinese households have developed a taste for the stuff that would make a county fair fry cook proud. Be it a simple stir-fry, poached fish or deep-fried pork ribs, many Chinese diners love their grub covered in an oily sheen. Jugs of the golden liquid make popular gifts for the Chinese New Year.

"Without the oil, it would taste too plain," Yi said as he tucked into a lunch of sliced cucumbers and chicken drumsticks slathered with grease. "I wouldn't want to finish it."

And that has officials in Beijing worried. The worst U.S. drought in half a century is sending global grain prices soaring. The fallout is almost certain to be felt at dinner tables across China. The No. 1 foreign buyer of American soybeans, which are pressed into cooking oil and used for animal feed, China last year purchased about half of U.S. exports, more than $10.4 billion worth, according to the American Soybean Association. China has also stepped up purchases of U.S. corn and wheat to feed the nation's growing appetite.

Poor U.S. harvests could fuel Chinese food inflation and social discontent. China has already begun tapping its grain reserves to ensure price stability. The government has ordered the nation's biggest cooking oil producers twice in recent months to keep their prices in check. And it's scouring the globe for alternative supplies.

It won't be easy. More than two-thirds of cooking oil consumed in China comes from soybeans, and most of those soybeans are supplied by the U.S., according to Ma Wenfeng, an analyst with Beijing Orient Agribusiness Consultant Co. For now, Chinese consumers are bound to the fortunes of farmers in the American heartland.

"Soybean oil is the most important edible oil in China ... which makes us vulnerable to the drought," gripping the U.S., Ma said.