Commodities 2023: China's soybean imports to recover on improved margins, restocking needs

China's imports of soybeans are expected to recover in 2023 amid improved margins, rising demand in the animal feed sector and a need to replenish state reserves, analysts told S&P Global Commodity Insights. The rising COVID-19 cases in the country and the government's approach to tackling the pandemic will introduce an element of uncertainty to this scenario, the analysts added.

The country's imports of soybeans are forecast to grow 8.3% year on year to 98 million mt in calendar year 2023, according to a survey of market participants at over 10 major trading, crushing and brokerage companies by S&P Global Dec. 9. This comes after a year of weak demand due to poor crush margins and weak domestic consumption.

China-based analysts and traders also said that the increase in inflows would be driven significantly by demand to restock government-owned reserves. Industry sources estimated that there will be a need to replenish stocks by as much as 7 million mt in 2023 after multiple rounds of soybean auctions held by the state reserve in 2022.

The US Department of Agriculture also sees China's soybean demand spiking to 98 million mt in the marketing year 2022-23 (September-August).

Rising feed demand coupled with limited availability and higher prices for protein-rich substitutes is expected to raise China's soybean imports by 7 million mt on the year in MY 2022-23, the USDA said.

China's overall feed demand is expected to rise in MY 2022-23 on greater hog inventories following recent destocking and higher output from the poultry, ruminant and aquaculture sectors, the USDA said, adding that all of these factors are likely to push soybean demand to near record levels.

China processes over 80% of imported beans into animal feed.

China's soybean crush margins are also set to improve, especially from the second quarter of 2023, amid higher demand for soybean meal-based animal feed.

However, some uncertainty remains over the volume of China's soybean imports in 2023.

"Demand growth from commercial crushers is expected to be 2%-3% year on year as some crushers are still struggling with crush margins for Q1 shipments in 2023," said a Chinese buyer who expected total demand from commercial crushers to be in the range of 90 million-92 million mt in 2023.

In China, crush margins are directly connected with hog margins as most of the processed soybean meal heads towards its burgeoning pig farms.

Russia-Ukraine war to boost demand

At the end of 2021, prices of almost all agricultural commodities -- soybeans, corn, wheat, sunflower -- hit multi-year highs amid drought across the world's key producer regions. Prices then hit all-time highs amid the Russia-Ukraine war that followed.

Ukraine is one of the world's top exporters of wheat, corn and sunflower products and a major agricultural supplier to China.

"The problem that everyone faces at the moment is that there is no cheap feed alternative," said Pete Meyer, head of grains and oilseed analytics at S&P Global. "Doesn't matter the kind of meal, or even if it's wheat for feed, all of these ingredients are expensive," he said.

In addition, tight supply of alternative feed ingredients from key locations points toward higher soybean demand in 2023.

"China has a large crush infrastructure, so while they may not be happy about soaring beans prices, they have to produce more SBM feed," Meyer said, adding that this is especially the case "when the supply of alternative feed ingredients from Ukraine remains dubious."

Oversupply concerns

Although China is expected to import near record levels of soybeans in 2023, some analysts said that a strong Brazilian harvest in MY 2022-23 is likely to cause a supply glut.

Brazil is forecast to produce over 150 million mt in MY 2022-23, with some agencies even expecting volumes to cross 160 million mt.

With the South American nation expected to consume roughly 50 million mt in domestic crush in MY 2022-23, nearly 100 million-110 million mt will be available for export.

"I am not sure the world needs 100 million mt of soybeans from Brazil in MY 2022-23," said Kory Melby, a consultant with Brazilian Ag Consulting Services.

S&P Global's Meyer seconded this assessment, saying that "it is unlikely that the market will digest a supply surge of 150 million mt early next year." However, if the drought-hit Argentinian crop were to fail, then Brazilian farmers could pitch in and export more, he added.

COVID-19 uncertainty

China's COVID-19 situation is dire and likely to impact MY 2022-23 demand, analysts said.

Beijing's zero-COVID policy has strained the country's soybean demand in 2022, which fell 8% on the year to 80.6 million mt over January-November. Despite the recent easing of restrictions, there is a lot of uncertainty surrounding the course the government will take next year.

Some analysts see China's COVID-19 cases peaking in 2023 and expect the Xi administration to strictly reimpose restrictions, curbing trade flow once again.

If COVID-19 continues to adversely affect China's economy in 2023, its soybean demand could be cut to 96 million-97 million mt, a China-based analyst said.