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Premiums for soybean cargoes delivered to China from Brazil and the US Gulf were lower in 2023 than the previous year but they were also much more volatile, as elements including a bumper soybean crop in Brazil, logistical issues and sluggish Chinese demand drove price movements.
Between January 3 and December 23, the highest premium for front-month soybeans CFR (cost and freight) China assessed by Fastmarkets Agriculture was 260 c/bu over CME (Chicago Mercantile Exchange) November futures on September 7 for October shipment out of the US Gulf, while the lowest assessment was recorded on April 21, at the height of the Brazilian harvest, at a 55 c/bu discount to CME July futures for June shipment out of Brazil, which was also the lowest CFR China soybean premium in five years, according to Fastmarkets records.
“A bumper 2022/23 crop in Brazil, very slow forward farmer selling in Brazil, and Brazil’s storage deficit – those factors combined allowed Chinese importers to put a big pressure on export premiums, reducing CFR China prices and making room for record imports,” said Daniele Siqueira, analyst at Brazilian consultancy AgRural.
“The movement wasn’t a surprise…But the steep decline in Brazilian export premiums was deeper than we expected and proved once again how dependent we are on Chinese demand,” she said.
The average CFR China premium last year stood at around 142 c/bu, which compares with an average of 322 c/bu seen last year, when Brazil’s crop suffered heavy losses due to the impact of La Nina weather patterns.
In 2022, the lowest CFR China premium assessment recorded was at 201 c/bu and the highest at 415 c/bu, which was also the highest CFR China premium for the front month since late 2018.
In addition to the pressure from Brazil’s bumper harvest, China’s buying pace was also not sufficient to absorb the abundance of soybeans in the market.
“We started the year coming from a shortfall in the Brazilian crops in 2021/2022, which kept the prices elevated, especially with some players waiting for a Chinese economy comeback,” said Ranieri Pasinato Junior, a market analyst for Zairam Agrocomm Corretora De Mercadorias.
As the year started to roll, we see the consolidation of a Brazilian super crop that starts pressuring prices especially for short-term deliveries.
During the first seven months of this year, premiums for front-month Brazilian cargoes fell significantly below those for cargoes out of the US Gulf as the bumper harvest weighed on prices, while from August, as the US harvest began and Brazil’s attention turned to corn, the two became much more aligned.
If Brazil’s massive crop and sluggish Chinese demand were not enough, logistical problems also weighed heavily on the market in the early part of 2023, as heavy rains hampered fieldwork and operations at ports in the first months of the year, and Brazil’s infrastructure yet again proved insufficient.
“Because of the super crop, and because of the very slow farmer selling pace in January, February, April, and May, storage and the Brazilian export program got delayed,” said Eduardo Vanin, lead soybean analyst at the Brazilian brokerage and consultancy Agrinvest.
“Our soybean shipments during April, May, June, and July were huge because traders had to sell, so for China, the prices went down day by day, week by week, because of the selling pressure was larger than anyone could imagine – even Chinese crushers couldn’t believe Brazilian soybeans could be so cheap,” he said.
In mid-April, in just two weeks, cargoes billed for May shipment out of Brazil went from a 50-55 c/bu premium over May CME futures to a 50 c/bu discount, while similarly for June cargoes they saw premiums change from a 98-100 c/bu premium over July futures to discounts of 17-25 c/bu.
The fact that even new crop Brazilian soybeans were trading at a discount months before anyone knew what the new crop would even look like has illustrated the depth of plunges premiums out of this origin have taken.
But as the year progressed into July, the expected even larger selling of soybeans and corn from Brazil due to storage pressure as another bumper crop, this time the second corn crop, or safrinha, didn’t take place.
“Farmers left corn uncovered on the ground, so we didn’t really see the pressure on crop storage expected by traders and crushers… and then soybean basis premiums for Brazil became firmer day by day,” Vanin said.
US Gulf and Brazil soybean premium CFR China became more aligned, with much narrower spreads seen, while Brazil premiums did not see such wild fluctuations as they did in the first half of the year, even with ongoing logistics issues such as the droughts seen in October in northern Brazil, where low water levels were once causing concerns.
Another important element affecting CFR China premiums was sluggish demand from China, the largest importer of soybeans in the world.
While China’s imports of soybeans look good on the surface this year, reaching 89.625 million tonnes between January and November, a 13.3% increase from the same period in 2022, analysts say this was largely thanks to the availability of cheap Brazilian soybeans rather than a pick-up in Chinese demand.
China’s total import volume is expected to reach around 100 million tonnes this year.
“Chinese demand rose in comparison with 2022, which was a bad year, but it didn’t rise that much if we consider 2021 as a reference, and Chinese purchases were clearly driven by lower prices and stock building,” AgRural’s Siqueira said.
Meanwhile, worsening hog industry margins and a slow recovery of the Chinese economy remain a concern for industry participants.
China’s declining pork price this year, which is partly because of ample supply, has led to a hog-to-grain ratio of around 5:1 to 6:1 recently, prompting the government to launch its third state purchase of frozen pork for reserves in late November.
“A little ahead in the year, the weak comeback of the Chinese economy got another hit, as the housing crisis resurfaced with Chinese developer Evergrande, sapping expectations and bringing markets down,” said Pasinato Junior.
Hopes of a surge in demand for soybeans as China emerged from three years of stringent Covid-19 control measures were dashed by failing Chinese developers including Evergrande, whose debt woes have kept deepening and are causing mounting concerns about the state of the Chinese economy.
“We are not super optimistic about China’s demand for soybeans going forward, as that mainly depends on the state of the animal husbandry industry,” said a China-based crusher.
“But China’s imports of soybean reserves are expected to grow, which could partly offset the lukewarm commercial buying,” he said.
Indeed, since November China’s state-owned Sinograin has been actively buying up US soybeans for reserve purposes, with an estimated 80-85 cargoes thought to have been bought so far.