China and the Brazilian soybean production

For a long time, Brazilian soybean production has been widening the eyes of the Chinese. Soybean – in addition to being an option to the human diet as a source of protein – is traditionally an essential raw material for poultry and swine. With a population that is larger than 1.3 billion people, it is easy to understand why China closely observes what is happening in Brazil, the second largest world producer of this grain. The Asian country is the largest importer of soybean and the main destination of Brazilian exports of the product, which ranks second in sales in the country, after iron ore. Last year, Brazil exported US$ 11.4 billion in soybean, of which US$ 6.3 billion went to China, or the equivalent of 56% of foreign sales of this commodity.

Although in the second half of this decade, global consumption of soybean has shown an upward growth rhythm, the speed of expansion of the product offering has been superior, indicating a declining scenario for their prices in the biennium 2010-11. Due to the current trend of rising stocks for December 2010, it is estimated that the international price of soybean may decline by 11% compared to the same month last year, reaching US$ 9.1/bushel. In 2008, the average price was US$ 12/bushel, and in 2009, US$ 10/bushel.

This tendency of international falling prices is the consequence of increased production in crop year 2009-10 in the USA and Argentina, which, respectively, are the first and third largest producers of soybean. Due to the crisis of 2008, the USA – as a way to mitigate the effects of contraction of the local economy – has decided to expand the planting of the 2009-10 season, which resulted in greater supply and, therefore, a declining price.

In addition to this, Brazilian producers also decided, in July and August last year, to increase the planting of soybean, when prices were around US$ 10/bushel. Although such prices were lower than the average level of 2008, soybean prices were more attractive than those of corn, a traditional substitute for this oilseed. Under these conditions, for 2010, the expectation is a 21% decline in domestic prices of soy, to around R$ 35/sack (against an average of R$ 45/sack in 2009).

Another factor that has contributed to the decline of international prices of soy is the cooling of speculation in the futures market. This situation has arisen because it is difficult to convince economic agents that there is a shortage when, in reality, there is excess supply of the product.

In line with the above considerations, it is expected that the income of the Brazilian soybean complex – grain, meal and oil in the domestic and foreign markets – will close 2010 with a drop of 13%, down to US$ 35.2 billion, compared with US$ 37.3 billion in 2009. Such projections are strategic to China not only in terms of defining the volume of its imports but are also important to the plans of the Asian country to start planting soybean in Brazilian soil to meet future needs of consumption. Since the middle of this decade, Chinese importers have been trying to acquire the product directly from Brazilian farmers, but without success.

However, this intention seems to be close to becoming reality, considering the initial contacts developed between the Brazilian government and state-owned Chongqing Wanzhou Grain and Oils Group. The Chinese company plans to invest US$ 300 million to purchase of 100,000 hectares in western Bahia, with the goal of producing soybean.

If the negotiations progress, there will be a growing chance of a scenario of significant expansion in Brazilian supply and, consequently, a reduction in the cost of this commodity for consumers in China, in the long term. This situation, probably, should motivate China to prepare a huge offensive in investment in Brazilian soybean production.
 
Between this and that, there are strong reasons why Brazil should become the world's largest producer of soybean, surpassing of 100 million t/year in the middle of the decade (presently, its annual production is around 69 million t). This additional volume in soybean Brazilian production would be able to properly take care of not only future Chinese demand, but also the international demand for this kind of oilseed.