China struggles with oilseed
will feel the repercussions this year. According to a report from
the Economist Intelligence Unit China is aiming to reduce soybean
processing as part of efforts to cut back on run away inflation and
to promote domestic producers, but observers are warning that this
may not have the desired effects, writes Simon Pitman.
In recent months the Chinese government has taken a number of measures to cool the rate of economic growth - growth that has been heavily impacted by rising prices in the food sector. The result for the oilseed sector is that margins for crusher have been greatly reduced. This, according to EIU, has led to contracts being cancelled and reductions in import levels. Further to that there has been a tightening of import regulations for oilseeds, which has led to major challenges for South American soybean exporters to the country. However lower levels of importing are expected to resume in the last half of the year.
The problems with oil seed demand and supply mean that world oilseed demand is expected to be cut back from 2.1 per cent to 4.1 per cent for the year. EIU says that it has reviewed its estimate for the year and that this reduced figure accounts for the shortfall.
Even demand for palm oil is reported to be weak in the China market, with persistent rumours that contracts are about to be cancelled. The upstart of this reduction total oilseed export dependency, EIU believes, is that China is trying to reduce its reliance ahead of its domestic crops, which this year are expected to be much higher after the bad weather conditions experienced in 2003. This means that future imports of oilseed into the country will largely depend on these crop levels.
However, many industry observers believe that by trying to 'play' the market for oilseeds by anticipating a stronger crop for 2004/2005, China may be setting itself up for trouble. A recent edition of the newsletter Oil World, said that with the current situation in China pointing towards increasing pressure on the domestic agricultural sector, many oilseed producers are going to find themselves in trouble.
Oil World believes that with increasing pressures on the agricultural sector an already over-stretched industry will be left struggling to keep up with demand. In its assessment over 70 per cent of soybean crush requirements will still have to be sourced overseas for this season.
Overall the report estimates that 2003/04 world oilseeds production will fall to 268.2 million tonnes, around 7.4 million tonnes lower than estimated in our previous quarterly report. Lower expectations of soybean production in Latin America are the principal cause of the reduction, which has been hit by bad weather and fungicides. The EIU forecasts that production in 2004/05 will rise to 283.5 million tonnes, nearly 6 per cent higher than the 2003/04 total, as demand everywhere outside the China market is still robust.
Although oilseed exporters around the world have been fretting over China's aims to reduce its reliance on oilseed exports it would seem that, considering world demand is strong and China's domestic oilseed producers are not well prepared, it seems unlikely that there will be much cause for concern in the immediate future. This will come as particularly good news to soybean producers in Argentina and Brazil, who have built up a heavy reliance on exports to China in recent years.
