Brazil February soybean premiums plunge on weak China demand

15 Jan 2024 | Jane Li, Victor Gusmao

Soybean premiums out of Brazil, the largest producer of the oilseed, have plunged in the last week, dropping more than 60 c/bu amid pressure from weak Chinese demand, the start of the harvest season and other local factors, market sources told Agricensus.

Offers of Brazilian cargoes for February shipment were reported by industry sources at a premium of 85-95 c/bu Monday, with trade rumored Friday at 85 c/bu, compared with 140-145 c/bu over March CME futures CFR China last Monday.

For other shipment windows, CFR China premiums for Brazil also fell, albeit to a lesser extent, with offers for March reported at a 55-60 c/bu premium over March futures Monday, compared with an 80-90 c/bu premium seen last Monday, while premiums for other months also fell between 8 c/bu and 23 c/bu during the period.

The Paranaguá paper market followed the same path, dropping from a trade done on January 3 for February loading at parity with CME’s March futures contract to a 60 c/bu discount to March futures last Thursday.

Bids for February loading, meanwhile, went from a 15 c/bu discount on January 3 to a 90 c/bu discount as of last Friday.

As in past years, a major factor driving premiums lower in Brazil at this time of the year is the beginning of the soybean harvest, which naturally brings prices down as Chinese buyers know that producing countries’ storage capacity will be pressured by the harvest, according to Ranieri Pasinato Junior, a market analyst for Zairam Agrocomm Brokerage.

“But this time, some other elements are also at play, including South America's huge soybean production, a smaller Chinese demand amid poor crush margins and sufficient soybean stocks, and more competitive pricing of Argentinian soybeans,” Pasinato Junior said.

Another factor is the still substantial production forecast in Brazil, despite recent downgrades by analysts.

“Brazil would need to lose 20% of its initial production estimate so South America would have the same amount produced as last year, and the most pessimistic projections show it around 10%,” said Aldo Lobo of Origem Brokerage.

Meanwhile, potential logistical difficulties in Paranaguá, where there are still a lot of old crop to ship, could also have pushed the premiums down, according to Brazil-based sources.

In addition, trading houses are thought to have bought a lot of soybeans for this period that they now need to sell to China in February, but the window for doing this is shrinking, adding further pricing pressure, Eduardo Vanin, lead soybean analyst and brokerage and consultancy Agrinvest said.

Overall, brokers in both Argentina and China that Agricensus spoke to pointed to poor Chinese demand as the major reason for the situation, with the sources saying no one has any idea whether or when the demand could pick up.

Although China’s annual soybean imports saw their first year-on-year increase since 2020 last year, the country’s loss-making hog industry has led to weak soymeal demand and prices, which has in turn suppressed demand for the crop.

In a sign of its lukewarm demand for soybeans, China reported around 6.5 million mt of soybean stocks as of January 5, a 6.2% growth from the previous week and a 19% and 46% rise from a month and a year ago.

Soybean arrivals in January are expected to reach 7.5 million mt, which could continue to push up the soybean stock level, according to CNGOIC.

The plunge in CFR China soybean premium for Brazil meanwhile may not continue for much longer, as Brazilian farmers seem unwilling to sell given the low prices and subsequent horrible profitability, said Vanin.

As for domestic trade, farmer selling has been lukewarm, market sources said.

"We have seen only punctual trades at this beginning of 2024 as farmers are selling from hand to mouth, only to keep the cash flowing," said Alaíde Ziemmer, AgRural's market analyst.