Negative news is coming! Soybean meal futures fall to 3000 yuan. When will the weak demand in the aquaculture industry stop falling?

Affected by the sharp decline in US soybean prices, domestic soybean meal followed the trend of further decline in foreign markets. On January 15th, the 2405 soybean meal futures contract opened with a sharp drop, with a intraday decline of 1.9%, and finally closed at 3072 yuan/ton. The soybean meal futures price approached the 3000 yuan mark, breaking a new two-year low. Industry insiders have stated that the decline in US soybeans is due to the negative report released by the US Department of Agriculture on January 13th, which caused the price of US soybeans to drop by more than 2.5%, and the market briefly fell to around the 1200 cent/bushel mark.

In fact, this round of price decline not only resulted in a decrease in futures prices, but also in the domestic spot price of soybean meal, which fell from over 4200 yuan/ton in mid November 2023 to around 3500 yuan/ton recently, with a cumulative decline of over 700 yuan/ton, a decline of over 16.7%. During the same period, the futures price of soybean meal fell from 3600 yuan/ton to 3050 yuan/ton, a cumulative decline of 55 yuan/ton, a decline of 15.3%. Obviously, the spot price of soybean meal has fallen more than futures, and the soybean meal basis has weakened, "said Hou Xueling, an analyst at Everbright Futures, in an interview with the Huaxia Times.

The US Department of Agriculture releases a bearish report

The downward trend of soybean meal futures since mid November is mainly related to the expectations of overseas markets. From the annual supply and demand balance sheet, due to the significant increase in international soybean supply this year, although Brazil has reduced production, it has basically returned to last year's level. Compared with Brazil and the United States, Argentina's increase is very significant, and the market generally estimates it to be between 20 million and 30 million tons, which has formed a relatively obvious supply pressure on the international soybean market, "said Chen Jiezheng, an analyst at Galaxy Futures, in an interview with Huaxia Times.

At the same time, looking back at the starting point of this round of soybean meal decline, it began since the election of the new president of Argentina. Due to the new president's advocacy for overall agricultural adjustment, promotion of export sales of agricultural products to earn foreign exchange, and the introduction of relevant support policies, we believe that the release of supply pressure is the main reason for the rapid decline in soybean meal prices in recent times, "said Chen Jiezheng.

Since mid November, with increased rainfall in South America and favorable weather for crop growth, expectations for high yields in South America have strengthened. The increasing pressure on global soybean long-term supply has led to a decline in international soybean prices. The increase in Brazilian soybean exports has squeezed out some US soybean exports, and the sluggish US soybean exports have also led to a decline in international soybean prices, causing a pullback in US soybean prices against the backdrop of abundant market supply.

Looking back at the changes in soybean production last year, due to the impact of El Ni ñ o climate, the soybean producing areas experienced drought and little rainfall in 2023. The US Department of Agriculture continuously lowered the soybean yield in its August October 2023 supply and demand report, estimating it to be as low as 49.6 pu/acre from the initial 52 pu/acre. After November 2023, the US Department of Agriculture adjusted the soybean yield again based on the harvest situation, and the latest January report estimated the soybean yield to be 50.6 pu/acre, "said Hou Xueling.

Under the dual pressure of sluggish US soybean exports and high yields in South America, US soybean prices are seeking cost support downward. The decrease in the cost of Meidou undoubtedly opens up downward space for Meidou as the market support line is lowered. In terms of soybean production in South America, affected by the El Ni ñ o climate, there was little precipitation from September to October last year, resulting in historically low soil moisture values. Precipitation increased after mid November, and as of mid January this year, soil moisture values in Argentina have returned to above normal levels, while those in Brazil are slightly below normal levels.

Although the market believes that Argentina's soybean production is very optimistic and Brazil's early sowing soybean production has decreased, the total production is still high. The US Department of Agriculture's January supply and demand report recognized the optimistic outlook for Argentina's soybean production, raising it from 48 million tons to 51 million tons. At the same time, it also believes that Brazil's soybean production is optimistic, reducing it from 161 million tons by only 4 million tons to 157 million tons, higher than the research institution's estimate of 150-156 million tons, "said Hou Xueling.

Weak demand in downstream aquaculture industry

In recent years, the price of soybean meal has fluctuated greatly. From November 2021 to the end of 2022, there was a round of rise in soybean meal prices, especially in spot prices. In October 2022, the highest spot price of soybean meal in some regions soared to 6000 yuan/ton. Although the futures price increase was smaller than the spot price, there was also a big bull market in soybean meal futures during the same period, "said Lin Guofa, Director of Big Data Research at Brick Agriculture, in an interview with Huaxia Times reporters.

After more than two years of high spot and futures prices, people gradually believed that soybean meal should be priced high. However, as the tide receded, soybean meal gradually returned to its intrinsic value. In the long run, the price of US soybeans affects the cost of imported soybeans in China, which in turn affects the production cost of soybean meal. However, in the short to medium term, in addition to the price of US soybeans, the quantity of soybean port inventory, reserve inventory, oil prices, and soybean meal inventory in oil factories all affect the fluctuation of soybean meal prices in China, "said Lin Guofa.

Lin Guofa stated that without considering the fluctuation of US soybean prices, the pricing of soybean meal includes two industries. One is the soybean pressing industry. Oil mills need to obtain suitable pressing profits for pressing, and the cost of oil and fat sharing is high. Soybean meal can share less of the cost, and vice versa; The second is the downstream breeding industry of soybean meal, and the feed breeding industry has the ability to transmit changes in the demand and price of soybean meal.

It is understood that in general, when downstream demand is good, it will inevitably be accompanied by more soybean crushing. If there is an excess of soybean oil, its price will decrease. When downstream continues to suffer losses, there will be a reduction in production capacity and the search for other similar methods (such as low protein feed and other unilateral raw material substitutes), resulting in a decrease in demand for soybean meal and a natural decline in soybean meal prices. According to Hou Xueling, an analyst at Everbright Futures, the import volume of soybeans in China from November to December 2023 was 7.92 million tons and 9.82 million tons respectively, totaling 17.74 million tons, a decrease of 160000 tons from the same period last year and an increase of 150000 tons from the five-year average.

From January to March 2024, domestic soybean imports are expected to be 7.54 million tons, 5.6 million tons, and 5.3 million tons, totaling 18.44 million tons. This is a year-on-year decrease of 4.58 million tons compared to the first quarter of 2023 and a decrease of 1.37 million tons compared to the same period last year. The main reason is that the soybean arrivals in February and March were relatively low. From the pace of soybean arrivals, it can be seen that the overall soybean supply in China was sufficient from November 2023 to January 2024, and the import volume was relatively low from February to March 2024, "said Hou Xueling.

Due to the abundant market supply, the current domestic spot situation is not good. Due to the large amount of imported soybeans and the continued poor demand, the soybean meal basis continues to show a downward trend. In December, the domestic soybean import volume was around 9.82 million tons, only slightly lower than the 10.55 million tons in the same period last year. The import volume has slightly declined, but it is also the second highest level in history. The annual soybean import volume for this year is expected to be 100 million tons, which is a historical high, "said Chen Jiezheng.

It is worth noting that the decline in soybean meal futures is also closely related to the decrease in demand for pig feed. In 2023, the pig industry will face the most difficult year, with only a brief profit in August and losses for the rest of the year, resulting in an average loss for breeding throughout the year. From January to October 2023, the industry's capacity reduction rate is very slow, and farmers are still persevering. However, starting from November 2023, due to the cumulative impact of the epidemic and long-term losses, the cash flow of farmers is tight, accelerating the reduction of production capacity, leading to early slaughter of large pigs and a decrease in feed feeding enthusiasm.

This is reflected in the weak demand for feed, where high cost-effective feed and high meat to feed ratio feed are more likely to be recognized by farmers. As a result, the apparent consumption of soybean meal has decreased. In December 2023, the apparent consumption of soybean meal decreased by 10% year-on-year, which is also the first monthly year-on-year decline in 2023. Since January, weak demand has continued to plague the market, and the apparent consumption of soybean meal in the first half of January decreased by more than 15% year-on-year, "said Hou Xueling.

Will soybean meal fall below the 3000 mark?

Although there is no pricing power in the domestic soybean meal industry, after years of development, China's large-scale feed farming requires a large amount of soybean meal, and the demand for oil is huge. Therefore, changes in China's soybean demand also have a strong impact on global soybean pricing, especially in the context of global soybean production. In 2023, the soybean production in the United States will remain high and the planting area will increase. Even if Brazil's soybean production does not increase in the new year, it will remain at the historical high yield position, and other South American countries such as Argentina and Uruguay have high soybean yields. In this situation, changes in China's soybean meal and oil demand will have a huge impact on the global soybean price trend, "said Lin Guofa.

In addition, although soybean imports are at a normal high level, the demand performance is sluggish and the peak season is not strong, resulting in rapid accumulation of soybean meal inventory in the upstream end. As of early January, the soybean meal inventory of major oil factories in China was 970000 tons, an increase of 390000 tons from the same period last year and an increase of 230000 tons from the five-year average. Oil factories are experiencing severe inventory expansion, resulting in a decrease in operating rates for some of them.

Regarding this, Hou Xueling stated that although the amount of soybeans arriving at the port is high, the weekly crushing volume of soybeans is only between 1.6 million and 1.8 million tons, with an average of 1.7 million to 1.9 million tons in the same period of five years, and around 2 million tons in the same period of 2023. The current contradiction to be resolved for soybean meal is that supply exceeds demand. Soybean meal futures prices are constantly approaching the cost line to stimulate terminal consumption and increase hoarding consumption. Based on the current price feedback, the process is still ongoing and the conflict has not been resolved.

In the future, there may be a significant improvement in demand or a decrease in the supply side. In terms of demand, considering that feed consumption will enter the off-season after the year, except for stocking during the Spring Festival, prices need to be very low in order to stimulate downstream hoarding intentions. The decrease in supply side may be due to variables such as Brazil's soybean production or the contraction of domestic oil mill imports. Before the Spring Festival, we expect soybean meal prices to continue to operate weakly. Considering the stocking and price level during the Spring Festival, compared to unilateral short selling in futures, we recommend short selling futures+selling bearish options below 2800 yuan/ton, buying soybean oil and selling soybean meal arbitrage operations. "Hou Xueling said.

For the later trend, Lin Guofa stated that due to the oversupply of meat in China, frozen product inventory is at a historical high, the prices of aquaculture products are low, the application of low protein feed, and the demand for soybean meal is slowing down. With the successive listing of Brazilian soybeans and the pressure on American soybeans, it is necessary to gradually get rid of the high price of soybean meal in the past two and a half years and adapt to the long-term price of soybean meal below 3000 yuan/ton from 2014 to the first half of 2020.