China washes out Brazilian soybeans amid poor crush margins

14 Feb 2022 | Eduardo Tinti, Cai Chen

China washed out at least five Brazilian soybean cargoes from the beginning of last week up to Monday February 14, Agricensus has confirmed.

Several sources, both in Brazil and China, told Agricensus that Chinese crushers were heard breaching soybean contracts due to the combination of surging CBOT futures, skyrocketing Brazilian FOB premiums and negative crush margins in the Asian country.

“Chinese crushers prefer to washout contracts and pay the underlying penalty fees rather than originating Brazilian beans amid negative domestic crush margins,” HedgePoint Global’s Victor Martins told Agricensus.

“The arbitrage gains in the futures market more than compensate losses from contract breaches,” Martins added.

The idea is that crushers that had closed purchase deals for Brazilian beans by the end of 2021, and subsequently hedged their positions in the futures market and cashed in by selling off their CBOT long positions.

Considering that March soybean CBOT futures soared 29%, the equivalent to $3.56/bu, between the end of November and February 11, there are indeed potentially large financial profits to be made.

This could overcome the penalty fees related to washing out contracts, it is understood.

Under such rationale the incentive to breach contracts would have been amplified by particularly negative crush margins in China, which are capping spot soybean demand in the country.

According to Agricensus’ estimates, the Chinese average spot gross crush margins have been slightly negative since December, and plunged even further when China’s market reopened after its week-long Lunar New Year holiday in February.

Rumours about China washing out Brazilian soybean cargoes had been circulating in the market since the middle of last week and were confirmed by Agricensus on Monday.

“Some of the washout deals were done by COFCO at the CFR market… due to rapidly deteriorating domestic crush margins,” a China-based trader told Agricensus.

“We heard two of the cargoes were switched to the US origins amid the bad crush margins and slow loading pace in Brazil,” another Chinese analyst said.

The rumours contributed to pressure premiums in the Brazilian cash market, although some many market participants had been sceptical about their veracity.

Brazilian soybean spot FOB premiums surged to extremely high levels – the highest for front-month loading since November 2021 – in February backed by estimates showing a significant drought-driven crop loss in the country this marketing year.

On Thursday, front-month premiums plunged with contracts for March loading on the Paranaguá paper market tumbling 25 c/bu on the day.

This came as rumours about the washouts started to spread and many sellers rushed into the market to lock in deals, in the belief that premiums had already peaked and would start to trend downwards.

At the same time, the switch of cargoes from Brazil to the US heightened speculation that China would turn its attention towards the US as the deadline for the phase-one trade deal between Beijing and Washington approaches.

If confirmed, this could bolster US soybean exports, with potential impacts on ending stocks and on the CBOT price benchmark.