Chinese demand reducing US soybean supplies to 49-year low

(Bloomberg) In the 60 years that Ursa Farmers Cooperative has been loading Midwest soybeans onto boats along the Mississippi River, business has never been this good.

Barge convoys are heading south along the world's busiest inland waterway to New Orleans export depots at a record pace as demand surges from pig farmers in China, the largest pork-eating country. Soy stockpiles in the U.S., where farmers harvested the third-largest crop ever just six months ago, are the lowest relative to demand in at least five decades, fueling the second- biggest rally in prices to start the year since 2005.

"Our soybean supplies will be empty by the end of April," said Scott Meyer, grain department manager at the Ursa, Illinois-based terminal owner, which loads about 35 million bushels of crops annually. "Chinese demand for soybeans was a lot stronger than everyone expected this year."

The sales jump is boosting profit margins for processors including Bunge Ltd. and Archer-Daniels-Midland Co. even as costs rise for buyers including Michael Foods Inc. Goldman Sachs Group Inc. raised its six-month price outlook for soybeans on March 11, predicting "near critically low" supplies before the 2014 harvest.

Soybean futures rallied 12 percent this year to $14.4775 a bushel today on the Chicago Board of Trade, touching a nine- month high of $14.60 on March 7. Corn and wheat have rallied 15 percent. The Standard & Poor's GSCI Index of 24 commodities advanced 2.3 percent since the end of December, while the MSCI All-Country World Index of equities slid 0.7 percent. A Bloomberg Index of Treasuries gained 1.8 percent.

Shrinking Supply

Stockpiles of soybeans on March 1 probably dropped to 987 million bushels (26.9 million metric tons), the smallest for this time of year in a decade, according to the average of 30 analyst estimates compiled by Bloomberg. Reserves will be equal to 30 percent of estimated annual use and exports of 3.319 billion bushels, the lowest ratio for this time of year since at least 1965, U.S. Department of Agriculture data show. The agency will update its quarterly crop-inventory estimates on March 31.

Since Sept. 1, shipments of U.S. soybeans climbed to 39.7 million tons, up 22 percent from a year earlier and almost reaching the government forecast for 41.64 million tons for the entire 12 months ending Aug. 31, according to the USDA. Two-thirds of those shipments ended up in China, the biggest buyer, with exports reaching 26.494 million tons, topping the previous record of 24.464 million tons three years earlier.

Pork production has surged 38 percent in China since 2000, now accounting for more than half of global output, as the nation's expanding economy boosted incomes and people were able to afford to eat more protein. To feed the world's largest hog herd, livestock producers import U.S. soybeans that were as much as $7 a bushel cheaper than Chinese supplies in January, based on cash prices in the Gulf of Mexico.

"Chinese demand for U.S. beans was so strong, so early that it simply depleted supply," said Randy Mittelstaedt, the director of research for R.J. O'Brien & Associates in Chicago. Compounding the inventory drain was better-than-expected demand from Europe, hoarding of supply by Argentine farmers and a smaller crop in India, he said.

Soybeans may reach $16 "by July, when we essentially run out of domestic supplies and everyone is fighting to get the last bushel," Mittelstaedt said. Hedge funds and other speculators have increased bets on higher prices by 45 percent this year with a net-long position of 198,672 futures and options contracts, and on March 4 were the most bullish since 2012, when drought sent soybeans to a record $17.89.
Cancel Orders

The rally may not last. China will start canceling orders because it purchased more soybeans than it can use, and U.S. farmers are preparing to sow a record crop in 2014, according to Rabobank International, which predicted on March 20 that prices will slide to $12.40 in the second quarter before ending the year at $11.60. Soybean futures for delivery in November, after this year's U.S. harvest, closed yesterday in Chicago at $11.9325, a discount of $2.4925 to the May contract that has widened by 74 percent since the end of December.

China's stockpiling this year was a preventative move in case there was a repeat of last year's shipping delays from top exporter Brazil, where Southern Hemisphere crops are harvested from March to May, Rabobank analysts including Luke Chandler said in the report.

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