Domestic pull squeezes Russia-China soybean link
As demand rises and prices surge, will Russia further increase its export duties to lock up supply?
Russia’s much-vaunted increase in soybean production is struggling to keep up with domestic demand, prompting calls for further increases to export duties in a bid to lock up supply in the country and promote the further expansion of crush capacity, trade sources have told Fastmarkets Agricensus.
The ramp-up in output was trumpeted during the US-China trade war, with land made available to Chinese farmers and exports mounting on the back of burgeoning trade opportunity as Russia sought to capitalize on US trade dislocation.
However, with domestic demand rising and prices surging, the environment has dramatically changed, with flows to the country’s primary export customer – China – drying up on a combination of high export taxes and increased biosecurity, trade sources have told Fastmarkets Agricensus.
Early signs suggest that the movement of soybeans to China has slowed down dramatically through the early part of the new marketing year, as the country has become an uneconomic option on the back of increased export duties.
Russian soybean exports since the start of the 2021-2022 season back in September have plunged 74% year-on-year to just 84,000 tonnes.
Of that total figure, 90% has headed to China, according to analysts at local Ukrainian agency APK-Inform, while overall volumes to the country have declined by 65% to 76,000 tonnes, APK-Inform said.
While never a huge flow, soybean exports were supercharged through the latter half of the last decade, jumping from 24,000 tonnes in 2013-2014 to 892,000 tonnes by 2017-2018, before peaking at 1.3 million tonnes in 2020-2021, according to USDA data.
According to some Russian trade sources, the country’s export duty - imposed from July 1, 2021, has significantly affected the volume of soybean exports from Russia, and in particular to China.
Russia has imposed duties across most of its agricultural exports in recent months as it battles to control domestic inflation by slowing the pace of exports amid surging appetite from importers globally.
“Of course, the duty has had a significant impact on exports, but restrictive measures from China have also had and will have an impact,” a Russia-based source told Fastmarkets Agricensus.
The duty for soybeans is currently set at 20% of the price, with a floor of not less than $100 per tonne, but China has also beefed up its border requirements in the face of two highly infectious pandemics - African swine fever and, more recently, Covid.
“I think that’s because of Covid. Before, those imported Russian beans were planted by Chinese workers... close to the border. Due to Covid, the Chinese can’t go there now,” a China-based analyst said.
At the same time, other sources have speculated that China’s Covid-safe restrictions, which officially came into force on November 29, 2021, will increase pressure on soybean exports and have already reduced the interest of Chinese buyers in securing Russian soybeans.
Numerous crossing points between northeast China and Russia have introduced measures aimed at restricting flows, with the railway station at Suifenhe - near Vladivostock - no longer accepting covered wagons containing Russian goods, according to Russian media.
That covers anything that needs manual unloading or comes as a non-container cargo, and is likely to include critical commodity supplies such as coal, iron ore, fertilizers, cellulose, ore and agricultural products.
Since December 1, similar measures were introduced at another railway crossing point at Zabaikalsk-Manchuria, near the border with Inner Mongolia.
Before that, back on November 11, the government in the northeastern city of Manchouli – one of the major ports on the Sino-Russian border – published a notice banning imports of some goods through the Manchouli railway station, according to Chinese media.
“In fact, the imposed ban has covered many positions of Russian imports to China, except for timber,” local media quoted a Russian diplomat as saying, while a source at a Russian crusher laid the blame for the supply restrictions squarely at the feet of Chinese biosecurity checks.
“To a greater extent, the Chinese ban has affected the volume of exports - they have already swallowed the duty,” one Russia-based crusher told Fastmarkets Agricensus, although the imposition of the export duty had also cut back on bean smuggling.
And those measures are likely to stay in place at least until the onset of the Lunar New Year, in February, trade sources have told Fastmarkets Agricensus.
Despite the sizeable slowdown in Sino-Russian bean trade, the USDA is still maintaining a 2021-2022 export outlook for Russian soybeans at 1.2 million tonnes, down just 95,000 tonnes compared to the previous year.
That compares with local agencies that are already maintaining lower outlooks.
“APK-Inform Agency’s forecast for soybean exports is about 1 million tonnes, 25% less than last season. In October-November, China increased purchases of Russian soybeans relative to September, but the pace of recovery remains low, and the interest of Chinese importers is moderate,” Svetlana Kyrychok, analyst at APK-Inform, told Fastmarkets Agricensus.
Growing domestic need
The slowdown in exports comes despite preliminary estimates from the Russian Ministry of Agriculture suggesting that farmers have harvested a record soybean crop of 4.9 million tonnes, 9% more than last year.
But trade sources are also highlighting the growth in domestic capacity and ongoing concerns that existing capacity may not be able to secure enough supply even with the export duties in place.
Soybean crushers or processors report they are unable to secure enough raw materials, even with the record crop, and the shortness in supply has led to the suspension or postponement of planned new capacity in the sector.
Soybean processing volumes are estimated by market sources to range from 4.8 million tonnes to 5.4 million tonnes, which could rise to more than 8 million tonnes if new processing capacity comes online.
“Processing of soybeans in the 2021-2022 season may reach a record figure and amount to about 4.8-5 million tonnes, which is 6% higher than the previous season,” added Kyrychok.
The Oil and Fat Union of Russia has argued for a gradual increase in the export duty on soybeans, floating an increase from 20% up to as high as 30% as a measure to protect supply for processors.
“This year has shown that the 20% duty on soybeans is insufficient... In our opinion, a gradual increase in the duty on soybeans to 25-30% would speed up the process of reopening and construction of new processing facilities for soybeans,” said Mikhail Maltsev, Executive Director of the Oil and Fat Union.
For market sources, the impact of any increase in export duties is ambiguous - with some warning that the consequences of a reduction in exports could still see an increase in the domestic supply of soybeans and an increase in carryover stocks at the end of the 2021-2022 season.
Maltsev, of the Oil and Fat Union of Russia again, highlighted a scenario in which slow sales from producers could lead to a build up of on-farm stocks and ensure that a surplus paradoxically builds up.
“This is a unique situation, the reluctance to sell oilseeds [soybeans, sunflower, and rapeseed] will lead to a surplus in the raw material market,” added Maltsev.
Any increase in the duty would specifically target exports from the far east of Russia, via that border with China, and thus increase the supply in the region.
That in turn should lead to lower prices for the main product of the crush sector, soymeal, and increase competition with soymeal produced from imported soybeans.
Nonetheless, it is a far cry from the statements made by President Vladimir Putin in Moscow in November 2018.
At the height of the US-China trade war, Putin accused the US of turning its back on China and that Russia would step up its supply - a promise Chinese and Russian negotiators doubled down on during Sino-Russian trade talks in July 2019.