China has almost finished its buying of January 2022 shipments of soybeans as of this week. Many large crushers have already started contracting 2021/2022 Brazilian new crop soybeans for shipments in the first and second quarter of next year.
This was faster than many had expected in the market. Estimates for China’s total soybean demand for January shipment was slashed by traders and analysts.
Several market sources said that projections of January shipment demand were cut from nearly 7 million tons to just slightly above 5 million tons.
What difference would these 2 million tons make for US soybean exports and ending stocks in 2021/22 marketing year?
Weakening margins
One of the key drivers of Chinese soybean demand is the crush margin, serving as a key reference of profitability for crushers.
However, margins for January shipment have deteriorated since late November this year, dropping from about $10/ton to -$5/mt for soybean exports from the US Gulf region. For Brazil, the figure is even lower at about -$23/ton based on Sitonia Consulting data.
Hence, soybean buyers have reconsidered their purchase program with some diverting their source of supply from the Gulf to US Pacific Northwest, aiming for quicker shipments as the voyage from US Gulf to China could take 40-45 days whereas PNW to China normally takes less than a month.
Others pushed their January demand to February or March next year, waiting for cheaper Brazilian new crop as the world’s largest soybean producing country is expected to harvest a new record volume of 144 million tons in 2021/22.
“The core issue is crush margins being poor… It is not profitable for crushers to buy January [cargo] and sell March basis,” one China-based soybean meal trader at a large international crusher told Sitonia Consulting.
The industry generally assumes the full journey of a soybean cargo involving loading, shipping, unloading, customs clearance, and crushing would take two months to complete. Thus, crushers will aim to sell domestic basis two months ahead.
Early Chinese New Year
Another main factor on the demand side is an early Chinese New Year holiday season which is taking place in late January 2022, nearly two weeks earlier than last year.
This means that crushers will start to reduce or even shut their operations in mid-January until the holiday season ends in early February. China typically sees a brief but sharp drop in soybean crushing volumes around the holiday period.
Moreover, crushing activities are expected to be further impacted by the Winter Olympics event this year, which takes place seamlessly after the new year holiday. During major events, or in times of higher air pollution, industrial activities are often slowed by regulations, and crushers are occasionally affected by these regulations.
“Because of the Olympics, I now hear some crushers will cease operations for the whole month of February,” according to a China-based analyst at a futures company.
US logistic uncertainty
On the supply side, China’s willingness to ramp up soybean purchases from the US this year was dampened by major disruptions such as Hurricane Ida in September and continuous delays at the Panama Canal.
Concerns about cargo loading delay in the Gulf region mounted as the hurricane paralyzed some of the storage and export facilities when US 2021/22 new harvest just started to enter the market.
The impact is still being felt three months later.
“Domestic buyers can only consider Brazil now… December loading [in the US] currently seems pretty slow,” said one soybean trader at another international crusher.
Yet, the latest tornado in US state of Kentucky brought more uncertainties despite that the Southern state not being one of the key crop-growing regions for exports.
Elevation and storage facilities were said to be damaged by the tornado.
US 21/22 exports too high?
With Chinese buyers already focusing on soybean shipments in February 2022 and onwards, the chance of US soybeans to be competitive against their Brazilian counterparts is slim.
Brazil has had a smooth planting progress this season with more than 90% of the new crop planted as of last week. Harvest of the crop is expected to start as early as Christmas 2021 and the crop could last until the start of next US supply season in September 2022.
If China sources most of its beans from Brazil during the first three quarters of 2022, assuming no surprises in weather or logistics, US soybean exports could be overestimated by 1-2 million tons.
US soybean exports are forecasted to total around 56 million tons in this marketing year, and US exporters have sold nearly 40 million tons during the year of which 21 million tons have been booked by China by far.
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