ANALYSIS: Is the Phase One trade deal hurting China’s private crushers?

A ramp up in soybean purchases by state-owned crushers, coupled with firmer freight, has squeezed crush margins in China for all players, but it is the private crushers that compete in the market that will feel the pain the most.

The need to rebuild soybean stocks as the country’s pig herd recovers after the 2018/19 swine fever outbreak, alongside the political need to meet the pledge to buy more agricultural goods as part of the China-US trade deal, has seen state-owned crushers purchase up to 90% of all cargoes of soybeans over the past few weeks.

That has sent prices for Brazilian soybeans soaring from $353.75/mt in mid-May to $397.25/mt on Tuesday – the highest level since late January this year.

Part of that rise has been a hike in freight rates as China returns to pulling in about 1 billion mt of iron ore each year, which has forced up the cost of chartering dry bulk ships. 

But another part of it is the depletion of soybean stocks in the world’s biggest exporting nation – Brazil.

Yet what is unusual this time around is that the hike in the freight component for delivering soybeans to China is not being reflected in domestic soymeal and soyoil prices in the Middle Kingdom, and that means many crushers are facing lower margins.

Slumping margins

Based on Agricensus calculations, the average Chinese gross crush margin for the front three-month shipments has been sliding for four consecutive weeks from $29.37/mt in mid-May this year to around $17/mt last week, the lowest since late February this year.

Such a slide has significantly dampened buying interest from small-to-medium private crushers in China over the past month for both US and Brazilian beans, but it has not deterred state-owned crushers until very recently.

Since margins started to fall in mid-May, there have been 25-27 cargoes per week purchased by companies intending to ship soybeans to China.

And most of that has come from the state-sector – namely Cofco and Sinograin – which have together accounted for between 60-90% of the volume.

“Crushers of their size can survive lower margins,” one trader told Agricensus, hinting that it was less palatable for smaller crushers.

While some of those purchases are for beans originating in Brazil, the majority is being sourced from the US, as both Sinograin and Cofco have been told to rebuild stocks, preferably from Uncle Sam.

And with every public Chinese purchase of soybeans pushing up the price of futures on the Chicago Board of Trade, for those that require a higher crush margin to operate, it’s tough times.

Just this week, the July-August contract on futures went into an inverse structure – whereby soybeans for August are cheaper than for July.

That highlights the unusual buying pattern for more spot material as the price of soybeans for export is higher than the equivalent price to deliver inland into the physical exchange contract.

In brief, near term prices are unusually high relative to the rest of the curve.

Another 10 bucks

So where do the margins have to be before private crushers will re-enter the market?

Evidence suggests that they need to rise another $10/mt on their current level.

Between mid-April and mid-May this year, average crush margins for the front three-month shipments were around $31/mt, according to Agricensus estimates.

At that time, 30-35 cargoes per week were purchased by crushers – both state and private.

As the average margins retreated around $9/mt in the past five weeks, buying slowed to around 25 shipments per week.

That volume slumped to 14-15 cargoes last week.

Private crushers only bought 13 out of the total of 44 cargoes traded in the past two weeks.

“Margins probably need to be $10 more,” one Chinese source said.

Other sources agreed.

There is little talk at the moment of cutting crush volumes in China, but that is exactly what needs to happen if the state-owned purchases of soybeans are to continue.

And to meet the ambitious target of purchasing $36.5 billion of agricultural goods from the US, it’s likely that those purchases will need to continue.

It’s just likely that private crushers will need to pay a heavier price.