State media calls for subsidies increase; Market softens ahead of USDA forum

State media calls for subsidies increase for domestic soybeans as planting subsidies lead to oversupply

A recent editorial in the state media outlet Economic Times says that China should continue to “broaden the domestic soybean market” and increase government support for the soybean industry. While the editorial advocates for increasing domestic production and reducing reliance on imports, it also unintentionally calls into question the reason for this expansion.

The author notes that production is estimated at 20 million tons last year, much higher than the previous levels of 14-16 million tons. Additionally, they estimate domestic consumption for food use at 15 million tons, meaning there is a surplus of 5 million tons.

But this surplus of soybeans won’t be used for animal feed, and the author notes that this is because “the price is high and the oil yield is low, and crushing companies are unwilling to purchase domestic soybeans.”

Additionally, the author notes that upstream prices are high, downstream demand for soy food products is “sluggish” and many soybean processors in the non-GMO space are struggling to operate.

To resolve these problems, the editorial suggests that the government should provide subsidies to soybean crushers who use domestically produced soybeans to help offset the price difference compared to imported GMO soybeans.

As China is unable to restrict imports of soybeans in the same way grain imports are restricted, the domestic market will always favor imported soybeans as they are cheaper due to economies of scale and better technology in the US and Brazil.

To promote domestic production, and slightly increase self-sufficiency, the government pays outsized subsidies to soybean farmers who would make better returns from planting corn.

This has led to an oversupply of domestic non-GMO soybeans as crushers think the low yield is low and they can’t profitably crush them for animal feed. To resolve this issue, state media commentators are now suggesting the government provide even more subsidies to support the crushing of domestic soybeans even though they aren’t competitive against imported US and Brazilian soybeans.

China has a limited land base and widespread adoption of GMOs and rising yields will be a major way that self-sufficiency is increased. Policymakers were previously pushing for increased soybean production during the trade war in 2016 but this led to a reduction in corn acres and much higher corn prices. They then reversed course and became focused on setting a “red line” which grain area shouldn’t fall below.

Now, policymakers are focused again on soybean production and reducing imports, but this will likely only lead to a reduction in corn area meaning that self-sufficiency gains in soybeans will trade off with self-sufficient losses in corn, leading to a larger need for corn imports.

Market softens ahead of key USDA report

The domestic futures market in China traded largely lower on Thursday as traders trimmed exposures ahead of the influential USDA Agricultural Outlook Forum that will release key estimates for soybean, corn, and wheat crops in the US.

The annual forum tends to set the clear tone of US production each year causing strong market volatilities in the past.

Although traders expect some figures from the USDA could be bullish, it is sensible to cut exposures and wait for the final results.

Futures close