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** Chinese Imports Seasonally Slow In February: Preliminary Chinese trade data was released on Thursday, but was glossed over by the WASDE and Brazilian crop reports. Chinese customs data showed a monthly import total of 5.42 MMTs for February, slightly below last year and a larger than normal seasonal decline. The sharp break was likely due to the New Year holiday occurring in February this year. Based on weekly export shipment data, we estimate a March import rate of 6.8 MMTs, followed by an April import total of 8.6 MMTs. If realized, the marketing year import total by the end of April would stand at just over 53 MMTs, or nearly 4 MMTs increase (8%) over last year. The USDA has held their annual import forecast at 97 MMTs, and the lower chart (which includes Mar and Apr estimates) that the current pace of trade is right on track to reach their forecast. We expect that forecast to remain static into much later in the year.
** Soymeal Stocks Decline Post New Year Holiday: Soybean crushing rates have kept pace with the record large import rate, and ahead of the New Year holiday the cumulative crush total was up 14% year over year. The weekly crush was down sharply through the holiday week, and was only 75% of average last week for a weekly total of 1.4 MMTs. The back to back weeks of light operations pulled weekly meal stocks down to a 13 week low, but back in line with the 5 year average. But on return from holiday, Chinese markets needed to adjust to world soy markets that had rallied sharply during the week. Cash meal prices jumped nearly 5% last week, which also lifted estimated soybean crush margins to the highest level in more than a year. This looks to keep processor demand up as large tonnages of both US and Brazilian soybeans arrive in the coming weeks.
** Estimated Chinese Hog Margins Plunge In Early 2018: While soybean imports for crush demand appears extremely robust, the one area of concern within the domestic Chinese market is in hog sector. Domestic cash hog prices have fallen precipitously since the start of the year, with price quotes this week down 26% from the January high and nearly 30% less than a year ago. The chart shows that the drop in market hog values, along with rising feed costs has squeezed estimated feeding margins back near break even levels for the first time in 3 years, with several provinces showing losses for the first time since early 2015. Monthly estimates of Chinese hog inventories have shown a contracting hog herd every single month since Dec 2013, and hog changes inventories have had no measurable relationship to domestic feed demand. This has called into question the accuracy of the government’s estimates. However, the drop in price and the fall in hog margins will be watched for any changes in feed demand in the coming months.
World wheat ending stocks have ballooned to a record 268 MMTs! Since 2012, world wheat stocks have risen by an amazing 50%. And since 2015, world end stocks have been pushed incrementally higher in almost every USDA monthly report. As a result, CBOT and world fob wheat prices have been depressed.
However, China’s share of world wheat stocks has risen incredibly over the last decade, and in 2017 the USDA projects China to hold a record 48% of the world’s total stored wheat supply. This wheat is not in an exportable position, but like Russia, Chinese wheat yields have been rising sharply and at some point, China will have to clear out its inventory.
The issue ahead is that the market is no longer providing incentive for non US wheat producers to expand acreage. However, we doubt that a substantial decline in wheat stocks lies in the offing. World wheat demand would have to expand for such a stocks decline.
Russian wheat yields in 2017 nearly matched those of the west at 45 Bu/Acre, and similar yields can be expected in the years ahead with normal weather. But due to oversupply and a 5% rally in Russia’s currency since early December, Russia’s domestic market in rubles has been weak. ARC doesn’t expect Russian wheat farmers to cut planted areas, but further expansion is unlikely.
Russian wheat seeding has expanded 9 Mil Acres in the last three years, or roughly 15%. But, with domestic price down 15-17% from a year ago, acreage in 2018 and perhaps beyond will be unchanged.
The US will plant a bit more spring wheat, Australia will plant a bit more amid rising prices there, but overall the world wheat market is not signaling the need for new global acreage.
ARC projects world wheat area less China at 196 Mil hectares, up marginally from 2017, but well below 2015 & 2016. Then assuming trend yield and trends in consumption (which are mild), the most probable world wheat balance sheet (less China) is below. Domestic food use has shown signs of better growth as emerging economies perform. GDP forecasts for emerging markets in 2018 is rather solid, and places like Latin America and the Black Sea have rebounded particularly well. Higher crude prices will aid purchasing power in North Africa & the Middle East, and so wheat demand growth will continue, albeit slowly. The point is that amid cheap wheat prices and rising food use, world end stocks minus China are forecast at a 6-year low 130 MMTs. Confirmation of trend yields in the Northern Hemisphere are required to pull spot futures below $4.20 for any length of time. But adverse Black Sea weather is needed for a sustained recovery.
The preliminary Chinese trade data released on Friday showed soybean imports for the month of November at 8.68 MMTs. That figure was just over 1 MMTs short of what had been expected based on October exports from major soybean producing states; though, the difference will be rolled forward into December. October and November imports were both record large, and a record large import total near 10 MMTs is expected to be confirmed for December. This would be put Oct-Dec imports at a record large 24.5 MMTs, or an 11% increase over a year ago. In the November WASDE report, the USDA raised their forecast for annual imports to 97 MMTs. The chart plots the relationship between Oct-Dec and annual imports, which suggest that the November increase was justified, and that China is on track to a record large import total.
And while there has been persistent worry that Chinese importers have overbought or are importing soybeans far faster than needed, the latest crush data shows that processors are working through supply at a record rate. Soybean crush last week was estimated at 1.96 MMTs and marked the 3rd consecutive week above 1.9 MMTs. 10 weeks into the crop marketing year, the cumulative crush total is estimated just short of 18 MMTs, or 106% of last year. The chart plots the relationship of cumulative crush rates against the annual crush totals according to the USDA. The 17/18 estimate was increased to 95 MMTs in November, up 1 million from the October forecast and an 8% increase over last year. To date, processors look to be on track to reach that target on strong domestic feed demand.
The Chinese pork industry is the largest consumer of soymeal, but reconciling government inventory data against implied feed demand has been one of the greatest challenges for analysts. The Ministry of Agricultures (MOA) offers monthly estimates of changes in inventory versus both the previous month and year, but does not provide an actual census. The chart shows that according to the MOA, that both the market hog and sow inventories have marked year over year declines, every single month since 2014. The latest available data is for August, which shows that the market hog inventory was down 5.6% from a year ago, with the sow herd down 4.7%. Yet somehow, soymeal demand continues to increase, while hog production margins estimates have been positive every single month since January 2015. Our best guess is that the shift from backyard to commercialized farming practices explains some of the discrepancy between lower inventory and higher feed demand.
The preliminary trade data from China that was released on Wednesday showed October soybean imports were up slightly from a year ago, and the largest import figure for the month, at 5.86 MMTs. The complete trade data will be released later in the month, but the US and Brazil are each known to have exported over 2 MMTs in the month of September. US exports jumped sharply through October, while the Brazilian export pace slowed. However, the Brazilian export pace has held above last year, which has limited the potential for early season US export totals. The October WASDE was about 1 MMTs too low on old crop Chinese soybean imports, and could reasonably raise the forecast for new crop imports by 1-2 MMTs, based on the October import and early season crush totals.
6 weeks into the 2017/18 crop marketing year, the Chinese crushing industry has not offered any indication that it is slowing down. Last week’s crush rate was estimated at just over 1.8 MMTs, slightly better than a year ago and the cumulative crush total to date is estimated at 10.3 MMTs versus 9.6 MMTs a year ago. Estimated Chinese hog producer margins are below a year ago, and down from the early year highs as market hog prices have declined. However, estimated margins are still very profitable. While Chinese hog inventory data has proven to be very unreliable, record large soybean crush rate and decline in estimated soymeal stocks, looks to be reflecting very strong feed demand. The sharp drop in market hog prices in the last year also appears to be confirming improved hog numbers/pork production.
Chinese soymeal prices bottomed last May and then steadily traded higher thru the summer. Today, spot soymeal prices are nearly 8% over the spring low.
However, both soymeal and soyoil values are trading well under a year ago, while US soybean prices are nearly unchanged! This is concerning.
The chart shows the CME soybean/DCE soy product crush spread, or an estimate for profitability of buying US soybeans today and selling soy products in China next month. Note that while the spot spread has started the year well under last year, it has not impacted either crush or import totals. Moreover, forward margins offered for the spring and summer months are giving Chinese soy crushers the opportunity to lock down paper profits that are near both last year and the 5 year average. This should keep China active in world soybean trade.
China’s preliminary trade data for the month of June was released on Thursday, showing all origin soybean imports totaling 7.69 MMTs. The June figure was inline with expectations and just above last year, but a 20% decline from the May import total. Exports from Brazil and US during the month of June indicate that the July import rate could slip below last year, and be closer to 7.5 MMTs, which if realized would put Oct-Jul import total just over 74 MMTs. In the July WASDE report the USDA increased their estimate for 2016/17 Chinese soybean imports to 91 MMTs. If our estimate for July imports is correct, August and September imports would need to average just over 8 MMTs to reach the USDA’s target. The problem is that Brazilian export shipments to China peaked back in April and have been trending lower ever since, while the US export pace is bouncing along at seasonal lows.
The Brazilian vessel lineup continues to add boats, with just over 6 MMTs of soybeans expected to sail during the month of July. If realized, this would be a the largest July export total on record. However, roughly 75% or 4.5 MMTs of the that export total will be headed to China, which means that US shipments would have to accelerate in the coming weeks to make up the Brazilian short fall to reach 8 MMTs in August. US outstanding export sales are just below last year at 6.7 MMTs, but just 1.7 MMTs of that total is to China. China is on pace for record imports this, year but we think that the USDA may have been preemptive in raising their annual import forecast on Wednesday. Brazilian/US shipments to China need to pick up through the last half of July and into August for the USDA’s forecast to be realized.
Estimated Chinese crush margins turned negative in late February as building domestic soymeal stocks and a record large crush pace pressured soy product prices lower. However, estimates on weekly crushing rates have generally matched or exceeded a year ago since March. Last week’s crush was estimated at 1.7 MMTs, while the cumulative crush total of 68 MMTs is at 107% of a year ago. While the USDA increased their estimate of old crop Chinese soybean imports, they maintained the old crop crush estimate at 86.5 MMTs or 106% of last year. Estimates for Chinese soymeal stocks have backed off the June highs, but are still historically large and in excess of 1 MMTs. However, soy product prices have followed the US markets higher and margins are now thought to be at or above break even levels. Note that the seasonal trend for crush rates through the end of the year is flat, and we agree with the USDA’s 86.5 MMT soybean crush forecast.
Estimated Chinese crush margins in the cash market have ranged from mildly profitable to deep in the red over the last several months, depending on location and basis relationships while futures based crush spreads between Chicago and Dalian have held well over last year since October. Despite the less favorable cash estimates, Chinese soy processor continue to crush soybeans at a record setting pace. Chinese soybean crush last week was estimated at 1.88 MMTs, the largest since late February and the 2nd largest weekly crush total since the New Year holiday in late January. The cumulative crush total for this year is record large and up 8% year over year, but on track to reach the latest USDA forecast that calls for a 6% increase in the annual soybean crush to 86.5 MMTs.
The preliminary trade data from Chinese Customs was released on Monday and showed all origin soybean imports totaled just over 8 MMTs in the month of April, up from 6 MMTs in March and 7 MMTs a year ago. April imports were also record large for the month, but once again fell short of expectations derived from monthly shipment data from major exporting countries. Cumulative Oct-Apr imports total 50 MMTs, 9% over last year and also record large. Based on trade flows from both North and South America during the month of April, we estimate that May imports could are also likely to reach a new record, and could surpass 9 MMTs. Brazil shipped 7.3 MMTs in March, and the US sent 1.5 MMTs, while shipments in April were at 6.8 MMTs for Brazil and just over 1 MMTs from the US.
In the April WASDE, the USDA raised their long held estimate for Chinese soybean imports to 88 MMTs, with annual crush forecast at 86.5 MMTs. While the current crush pace still does not offer a strong reason to increase estimates for annual crush, the pace of imports continues to suggest that the USDA forecast could still be a couple million tons too low. Assuming our estimate for April imports, the cumulative total would be just over 59 MMTs, or 11% over last year, versus the USDA forecast that calls for a 6% annual increase. Based on the recent pace of exports to China, we think that the USDA could again increase their forecast by 1-2 MMTs in May WASDE, as the current forecast implies Jun-Sep imports falling to a 3 year low. A number of private estimates have already moved to 90+ MMTs.