China's Soybean Crisis

It’s estimated more than 3 million tons of unsold soybeans are sitting in farmers hands in China’s northeastern province of Heilongjiang. It must be noted with equal awe that China’s massive reserve purchasing program is also storing a huge quantity—at best estimate about 5 million domestic beans and 2.5 million tons of imports for a grand total just under 8 million tons, ready, willing and waiting to be dumped on the domestic market at the appropriate time. However, that is another story and will have to wait for a blog entry later this week. Now, the crisis facing the government is how to satisfy very disgruntled Heilongjiang soybean farmers just as they are preparing to hit the fields and plant more soybeans. Rumors surfaced today that the government was “studying” the issue and considering various alternatives on how to dispose of the soybeans. As I see it, they have two alternatives. One is to allow the farmers to sell directly to traders, both foreign and local, and let them do their magic. This, of course, raises many questions such as what if the higher priced, higher moisture beans are mixed with the lower moisture and lower cost imported beans. Never mind the fact that mixing has been an ongoing deal since China began importing soybeans. And we all heard the rumors about cheaper imported beans being mixed with local beans in the northeast and delivered to the reserves.

A second option would be to work a deal with the country’s foreign owned (including COFCO which is very much Chinese owned) crushing capacity and have them work the supply into their storage. Offer them a discounted price—considerably less than the 3,700 yuan/ton official procurement price. Do this over the course of the year so as not to disrupt the current DCE price levels and flatten the market. The government could easily strong arm the crushers about this and make them take the beans just as they made them keep vegetable oil prices under guards when inflation was out of control. But, I believe the government is interested in finessing a deal and today’s “story” was a way to gather feedback before making a decision. If I were a crusher in China, I would have already approached the government about “helping” out with the soybean situation. In return, I’d like to have some of the current restrictions on additional foreign owned crushing capacity lifted.