China’s hunger for soy could drain world supply

October 14th, 2014

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Category: Grains, Oilseeds

Soybeans take a hit(Agrimoney) – Oilseed meals are poised to turn the tables on vegetable oils and drive price incentives for the sector, as China’s hunger for feed drains the world’s exportable supplies of soybeans, analysis group LMC International said.

Investors can be “relatively bullish” on soymeal prices long-term, thanks to the need by China to supply its grow its meat production industry, which is focused on pork, to meet demand whetted by a rising population and increased wealth, LMC senior economist Julian McGill said.

Indeed, the growing pace of China’s demand for soybeans – a meal-heavy rather than oil-heavy oilseed – will at current levels see it in a decade’s time “trying to import more soybeans than the major producing countries are exporting”, Mr McGill said.

“If China continues to import at this rate, we are going to run out of soybeans,” with the country’s projected demand of some 180m tonnes by 2024 exceeding the likely combined exportable surplus of Argentina, Brazil and the US.

‘Staggering consequences’

The potential return of meal to the driving seat in oilseed markets follows a period when vegetable oils have set the pace, spurred by the encouragement given by the European Union and the US for their use as raw materials for biodiesel.

Such a boost to biodiesel use, incentivised through the likes of blending mandates and tax credits, has had “staggering consequences” for the vegetable oil market, encouraging demand for vegetable oils, which had moved in step with that of meals until around 2000, to grow far faster since.

Some 15% of vegetable oil production is now used to make biodiesel, compared with a marginal level at the turn of the century, with one-third of global rapeseed output used for fuel at a 2010 peak.

Indeed, this dynamic has been a large driver behind soaring output of palm oil which, with its high production rates of 4 tonnes per hectare, and low levels of meal manufactured as a byproduct, is “ideally suited to rising demand for oil running faster than that for meal”, Mr McGill said.

‘Incentive disappeared’

However, a recent retreat in EU and US encouragement for biodiesel, though measures such as curbing blend rates, had helped curtail the vegetable oils boom, seeing prices converge with those of crude oil – which are themselves under pressure.

The fall of palm oil, for instance, below crude oil has a history of encouraging demand from biodiesel plants, in making production of the fuel viable even without state incentives.

Crude prices are being undermined by a reluctance by major producers such as Saudi Arabia to cut output despite the waning demand from countries such as the US, which are turning energy demand to domestically-produced gas.

With vegetable oil production remaining high, resulting price weakness has seen, for example, sunoil reach markets “where it has never been before”, Mr McGill said, citing Indian demand.

Furthermore, the low prices are placing a question mark over further expansion of oilseed sowings on the “frontiers of agriculture”, such as the interior of Brazil.

“The premium to expand agriculture in this frontier has disappeared,” Mr McGill said.

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