Tight soybean supply weighs on demand recovery in China amid surging crush margin

A surging soybean replacement crush margin that has spurred spot buying interest from Chinese crushers and tightening soybean supply for October and November shipments were pushing prices so high it may soon cap demand, market sources said Oct. 21.

The soybean replacement crush margin in China has surged fivefold in a month to be calculated at Yuan 1,240/mt Oct. 19, market sources said. The margin is the difference between spot soybean meal and oil prices and the import cost of soybeans in China two months prior.

"Domestic consumption demand and tighter pork supply have driven up the hog-raising margin; hence soybean meal prices continue to be supported by higher demand from the hog and feed sectors," a Chinese buyer said.

Amid expectations that soybean meal prices will continue rising, soybean demand projections have been revised higher for both October and November shipments, with demand for October revised up 1 million mt from the initial projection of 10 million mt and for November revised up 1.5 million mt from 8.5 million mt to 11 million mt, market sources said.

However, it has become difficult to secure spot shipments for both months, the sources said.

In Brazil, the pace of farmer selling remains slow as farmers focus on soybean planting, while the country's low soybean inventory has further reduced export sales.

In the US, low water levels in the Mississippi river system were delaying soybean loadings, which in turn was reducing buying interest from Chinese crushers as the disruptions were expected to persist. A shipping analyst said water levels on the Lower Mississippi were at levels not seen since 1988 and without sustained rainfall could fall further by early November.

Around 1 million-1.5 million mt of soybeans for November shipment remained uncovered as of Oct. 19 as Chinese buyers could not secure suitable supply from either Brazil or the US, market sources said.

"Other than Brazil and US Gulf soybeans, the availability of soybeans from the US Pacific Northwest is also lower currently, therefore the demand coverage for November shipments might not reach 10 million mt by the end of October," a Chinese trader said.

"We might be skipping demands for November and December shipments for US Gulf soybeans as the arrival would likely to be after the Lunar New Year in January 2023," a Chinese crusher said.

A source at a major soybean crusher in China said the replacement crush margin for purchasing US Gulf November soybeans and selling soybean meal and oil for January delivery in China was only slightly above breakeven levels and would be negative if a crusher were to purchase US Gulf December soybeans.

As a result, demand is likely to be hindered by the tight supply, the source said.

However, if the weather in Brazil remains favorable for new crop planting, soybean prices might fall in coming months on the expectation of ample supply, which could encourage Chinese crushers to increase purchases for December shipments, market sources said.