Market Matters Blog

Chinese buyers agreed to purchase 484 million bushels of soybeans for a little more than $5 billion at a contract signing ceremony in Iowa on Thursday.

That's a lot of beans -- about 17% of what USDA thinks China will import in the 2015-16 marketing year.

"There is a lot about this sale that I don't understand," one reader wrote to me. "Why such a large sale now? If my math is correct, that comes out to $10.95 per bushel. Cash beans in my area are $8.40ish. I could just be naive about international sales but it seems weird to me, weird in the sense of the timing. If we are going to have such a large crop soon there should be an abundance of cheaper beans in the near future. How long has this sale been in the works? Are they fearful of supply, or just ensuring a reliable supply? I don't keep track of what international buyers typically pay for soybeans. Is this a cheap buy right now for them? Maybe they anticipate the low is in and we are set for a rally?"

I love a good, complex question.

I think there are several important points to keep in mind.

First, there's a strong ceremonial aspect to China's culture. I've been to several of these signing ceremonies in the past and they are very formal. Important people give speeches. A representative from a U.S. grain company sits next to someone from Chinese company. They're introduced to the audience, sign a contract and shake hands. Rinse and repeat, until everyone has had a chance to sign and shake hands. Then they pass around champagne and have a toast. I'd say less than half actually drink it. It's more about the tradition of celebrating success by raising a glass of fizzy white wine and hearing it clink against your friend's glass.

These signing ceremonies recognize and honor the successful U.S.-China trade relationship. It’s as much of a cultural exercise as a business deal. Relationships are at the heart of trade, and this is one way the soybean industry recognizes and respects our relationship with China.

There were 24 agreements signed yesterday. Some of them were actual contracts with all of the specific terms (price, quantity, deliver date, etc.) figure out, but others were framework agreements that left a lot of the details to be determined at a later date. The actual sales and shipments of the beans bought on Thursday will likely be spread throughout the 2015-16 marketing year. So while this was a large one-day event, this isn't going to impact the market all atonce.

As for the difference in prices, it'simportant toremember end users pay more forgrain than farmers are paid at their local elevators because there's a cost involved with shipping grain halfway around the world, hence the difference between the purchase price and a farmer's cash grain bid.

Transportation makes up about 20% of the total customers in China pay for grain, according to this Soy Transportation Coalition chart (http://bit.ly/…).

So, to my reader's question, does the magnitude of this sale -- it's the largest in price and volume ever -- reflect the Chinese perspective on global soybean supply?

According to the latest supply and demand report, USDA thinks China will import 79 million metric tons of soybeans in 2015-16, about 2 mmt more than they bought the year prior. Now, that's not 79 mmt from us, the world's second largest soybean exporter. That's from everywhere.

Chinese companies agreed to buy 13.1 mmt from the U.S. on Thursday, or almost 17% of what USDA thinks China will buy this year. That's an impressive amount for a one-day sale.

Low prices tend to spur new demand. One thing we know about China is that its burgeoning middle class is eating more meat, and as Chinese farmers raise more hogs and poultry, they feed more soybean meal. It also means higher demand for vegetable oil. This has led to an excess of crush capacity in China.

China has the capacity to crush 130 mmt of soybeans each year, but it only crushed 71 mmt in the 2014-15 marketing year, according to a USDA report from earlier this year (http://1.usa.gov/…). That means businesses are very confident, and invested, in continued growth. Low prices give them an opportunity to utilize some of this excess capacity.

Crush margins -- the difference between what companies pay for beans and what they earn from selling the meal and oil -- are also expected to stay positive this year. According to an article on Agrimoney.com, margins for the second half of the year are expected to average $15 per metric ton. While that's down from the $30 per ton they received in the first half, it's an improvement from last year's narrow margins. (http://bit.ly/…)

China is making money with beans at these prices, and apparently, they think the profit margins are good enough to commit to lock in 17% of what they're likely to buy this year.

So, back to my reader's question: "Are they fearful of supply, or just ensuring a reliable supply?"

I don't think China is worried about running out of beans to buy, unless they know something I don't. USDA's currently forecasting global ending stocks for 2015-16 at almost 85 mmt with a stocks-to-use ratio of 27.4%. Brazil is expected to grow -- and is starting to plant -- a crop that’s several million metric tons larger than last year's bin-buster. All indications point toa bountyof beans.

With a healthy crush margin on the table, I lean towards thinking China's just trying to ensure they have reliable supply of high-quality U.S. beans. But then again, does anyone really know what China's thinking?

(AG/CZ)

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