The Chinese warn that “even the gods are hard put to foretell the price of mulberry leaves”. The idiom dates back to a period in which fortunes were made using them to fatten silkworms.
The proverbial lesson is more prosaic – that it can be very difficult to predict market prices – and so it has proved in the unglamorous world of soya bean trading in recent weeks.
Somewhat chaotically Chinese buyers have walked away from commitments to purchase 500,000 tonnes of imports. They may default on another 1.2 million tonnes in the days ahead, according to Reuters.
Losses on the contracts are thought to have reached $300 million, the most since 2004 when another round of defaults cost more than double that.
Chinese firms crushing soya beans into cooking oil or soy-meal are losing $100 on each tonne they process at current prices. So some traders have taken the decision to lose their deposits on new shipments rather than accept cargoes and be unable to sell them.
That leaves overseas sellers exposed too. “Most of the cargoes were delivered by the seller before receiving letters of credit and buyers are unwilling to pay now because they will suffer massive losses,” Shao Zhongyi, the boss of Shandong Sunrise, one of the largest soya bean importers, told Reuters. “If they take these cargoes, some could go bankrupt. That’s why they are choosing not to honour the contracts.”
Japanese trader Marubeni, the largest soya bean exporter to China, seems to be most at risk on the sell side. “More defaults are happening with Marubeni because it has more lenient terms – for example, letters of credit can be issued five days prior to arrival – and its deposits and advances are competitive,” an industry insider told 21CN Business Herald.
Grain merchants from the United States are more cautious, the trader said, requiring buyers to issue letters of credit before shipment.
Despite the softer market for soya bean products inside China, contract prices on the international markets have been buoyant, climbing to their highest levels in more than nine months last week.
Soya bean traders say that local sentiment has been hit by bird flu outbreaks and poultry culls, which reduced purchases of soy-meal for feed by as much as 30% in the first quarter. Yet China’s soya bean imports actually jumped by a third – a new record – in the same period. Zhang Xiaoping from the US Soybean Export Council told CBN that demand ought to be about 5 million tonnes a month. But 20 million tonnes were ordered in the first three months of the year. Some of that could be stockpiling to avoid a repeat of shipping congestion out of Brazil, which restricted supply last year. But imports may also have surged because soya bean cargoes are being used to get credit. (WiC first mentioned this kind of arrangement in issue 110. Because banks charge lower interest rates on letters of credit and offer repayment terms over several months, soya beans are seen as a way of sourcing cheap, short-term finance. Loans backed by physical shipments are then lent again at higher rates in the underground market. Some traders are even ready to sell oilseed at a loss, just to get their hands on the lending opportunity.)
But banks have been toughening up trade credit practices, withdrawing terms that were formerly available. Refusals to provide new finance meant that at least three soya bean importers from Shandong were unable to pay for shipments arriving at port, including Shandong Sunrise.
“Sunrise has 14 shipments facing default. There are six to eight ships at port with no letters of credit in place, while another six to eight out at sea don’t have letters of credit either. Another 20 or 30 shipments could default,” the soya bean insider told 21CN.
What happens next? Some think the Shandong traders have fired an opening salvo in a more concerted effort to bring down prices. But tightness in supply from the US will make that difficult, at least until later in the year, following reports that the robust market has encouraged American farmers to sow a record crop for harvest.
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