China's Soybean Dilemma Continues

It’s been very interesting to watch the multiple commodity reserve auctions in China. To date, corn, cotton, soy, sugar, rape and wheat have all either been offered via national auctions as a means of supporting or suppressing market prices. While not faulting the fundamentals behind the auctions, the disjointed effort and haphazard execution of the auctions clearly shows how the Chinese are scrambling and in most cases lack a consistent policy for commodity price support.

For example, with soybeans there have been three designated auctions with a fourth scheduled for the middle of this week. None have achieved anything close to impressive sales. About 5,000 tons in the respective auctions has been sold. Most traders and more importantly, crushers, are shying away from bidding due to the high offering price. The reluctance of the grains bureau to discount the beans on offer, despite solid feedback from the market that a high offering price wouldn’t work, illustrates the complexity from which the government is operating. On one hand, they would clearly like to see market prices ease whereby northeastern crushers could finally start crushing again. For the coastal and centrally located crushers northeast beans are of no consequence. They crush imports as I have mentioned often in this blog. Still, these same crushers at the right price would go through the logistical nightmare if it were an attractive option. It’s not.

Worse, there are deep concerns the failed auctions will spread over into farmer sentiment about future soybean crops. The current crop is widely reported to be substantially lower than in year’s past and with the heavy rain mixed with cold temperatures, there are deep concerns yields will be heavily impacted. In my opinion, the auctions on the surface may be the magician’s trick, forcing us to pay attention to the success or lack thereof; while the real issue is faltering output. As with the ongoing reduction of unnecessary textile capacity in China, the government very well may be forcing the northeastern based crushers into a position they simply can’t recover from.