In a Reuters wire news on Wednesday, three trading sources mentioned that China's soy importers are pushing to delay or cancel shipments, mostly with Brazilian suppliers, as they accumulate heavy losses in the crushing industry.
China is the main buyer that accounting around 60% of the soybean purchases worldwide. At the beginning of the year, China increased the soybeans purchase taking advantage from the positive crushing margins that had the industry. The lower prices in Brazil after the huge harvest of this campaign added to the tendency of the country's industrialists to aggressively buy the brasilian oilseed. As of today, the soybean gross processing margin turned strongly negative in recent days reaching a loss of -51.87 US $ / MT. Considering the available price of soybean in the main producing region of China - Shandong Province - and the prices obtained by the by-products multiplied by their conversion coefficients (used in 80% flour / 20% oil) would give us that the processors of China only by entering in their plants the acquired beans would be losing more than 50 US $ per ton.
Rumors that China's demand might ease have become a little more plausible after news of the cancellation of soybean shipments from Brazil for delivery in May/June. According to commercial sources consulted by Reuters many importers are trying to delay shipments of the oilseed, even others would be in the dilemma of canceling the shipments directly. Different sources consulted by this agency count of 5 to 7 panamax ships canceled. Each panamax-sized vessel carries about 60,000 tons of soybeans, which would mean losses of more than $ 3 million if each ship's cargo would be processed. ‘Shanghai JC Intelligence’ had already mentioned cancellations of four to five shipments for delivery in May and June last week, adding another two or three shipments resold to neighboring countries.
With respect to the Asian giant's demand, the recent counter-margins are only warning signs, as monthly imports from this country were breaking records month by month so far in 2017 and new records were anticipated in the months ahead. If one looks at the ship line-ups, it is noted that Chinese imports of soybeans for May and June could reach record figures, possibly 9 million tons for each month, and surpassing the figures for the same months of last year.
Crushing margins in Argentina
Consequently, and supporting what happened with the China demand, the margin for the local soybean exports has dropped sharply. If we take into account the FOB index value of the oilseed, surveyed by the Ministry of Agroindustry (the closest shipment value is US $ 350/MT) and we deduct the actual duty of 30%, we get a value of US $ 245/MT (duty free price). Compared to the internal value of US $ 237.36/MT at the local port, it results US $ 7.64 of difference, a value that would have to absorb marketing costs and those incurred in ports. This gives us the vision of very tight margins independently of the theoretical model of costs that we take for the exporting company.
The picture differs somewhat for the crushing industry. The basis for soy oil have become very positive in the last days, mainly for the shipment in June, being around 1.90 on the position of July of CME (this means a plus of US $ 41/MT paid on the value of the Chicago soy oil contract). The gross margin of the local industry is around 43 US $ (80/20). However, this gross margin is well below the gross margins observed in the last 5 years of 43.68; 60.88; 79; US $ 96.33/MT for the years 2015, 2016, 2013 and 2014, respectively. If we use a more realistic model in the conversion of meal and oil plus other by-products, subtracting operating and marketing costs, we would be seeing a very tight but slightly positive net margin. That is to say, a better relative performance of the industry compared to the export of the bean, taking into account the strong fall that had the oilseed (and its derivatives) since the beginning of the year.
Local market prices
Finally we should look the performance of the local spot prices. We compare the prices of the period May 24 (since in the middle we have the local holiday of May 25 and the US holiday of 29) / June 1. Both the price available in pesos and the available price in US $ did not change, while a fall of 3.66% (almost 13 US $) in the lead Chicago contract was evident. Identical movement could be observed in the FOB prices of the US Gulf.