U.S. soybean was climbing higher and higher to break the key 900 cents over the China’s National Day holiday, which could be contributed to its lower-than-expected inventory, the frost in some regions of the Midwest, upcoming U.S.-China trade negotiations and China’s purchases of 3.50 million tonnes of U.S. soybeans. And it extended its upward trend on October 8th. The most active contract recorded a two-and-a-half-month high, and the November contract was 5.25 cents higher at 920.50 cents/bu. Apart from positive technical factors, the Midwest is reported to be likely to be hit by unfavorable weather, with North Dakota, Minnesota and South Dakota to be covered by 6-12 inches of snow. This could damage the late-mature crops. And farmers in south U.S. are also unable to go into the field due to rainfalls. As of October 6th, soybean crops were 14% harvested, below 31% last year and the five-year average of 34%, according to a weekly report by the USDA on Monday. 

Fig. 1: U.S. soybean futures prices

The most active Y2001 contract of soybean oil on the Dalian Commodity Exchange (DCE) fell to 5,850 yuan/tonne before China’s National Day holiday, as the market sentiment was influenced by the fresh round of U.S.-China trade negotiations. But the losses and gains could be all due to the same thing. The contract was set to bounce higher after the trading was resumed on October 8 after the holiday, and returned to the key 6,000 yuan/tonne. The gains came after the U.S. had announced sanctions against 28 Chinese entities that were put on its so-called Entity List, which triggered strong dissatisfaction of Chinese government. The spokesperson of China’s Ministry of Commerce urged the U.S. to stop making irresponsible remarks on its internal affairs and remove those entities from the list. China also said it would take all necessary measures to safeguard its own interests and could also move forward with its own list of unreliable entities. Thereby, domestic oil and meal futures all posted huge rises. 

Fig. 2: Soybean oil prices on the DCE

Apart from uncertainty in U.S.-China trade talks, soybean crush also dropped sharply last week (Sept. 28-Oct. 4) due to the National Day holiday. The crush at domestic mills totaled 1,155,700 tonnes (meal 913,003 tonnes and oil 219,583 tonnes), down 659,450 tonnes, or 36.33%, from 1815,150 tonnes in the previous week. Meanwhile, the operation rate (capacity utilization) was 31.88%, down 18.19 percentage points from 50.07% in the previous week. Soybean crush will stay at a low level of around 1.30 mln tonnes this week as most mills have yet resumed production. 

Fig. 3: Soybean Weekly Crush in China (2015-2019)

Despite the sharp fall in soybean crush, soybean oil inventory continues to pile higher due to slow shipments as the demand is rather weak in the market. On the week as of Oct. 4th, China’s commercial inventory has totaled 1,350,840 tonnes, up 1,690 tonnes by 0.13% from 1,349,150 tonnes last week, up 18,540 tonnes by 1.39% from 1,332,300 tonnes last month, yet down 372,660 tonnes by 21.62% from 1,723,500 tonnes of the corresponding period last year. And the five-year average at the same period is 1,361,000 tonnes.

Fig. 4: China’s Soybean Oil Stocks in Recent Years

The increase in soybean oil inventory is a sign that the oil market is confronted with sluggish consumption and slack demand. The next holiday and festival are the New year’s Day and the Spring Festival, which means the market will not start replenishment until late November. From this aspect, the fundamentals of the oil market itself do not bode well for this round of rebound. 

Mills will very likely maintain their operation rates at high levels, as the demand for soybean meal is rising recently. The reasons are that local governments are proving strong support for hog breeding, the breeding margins of hog have soared to a high level of nearly 1,700 yuan/head, and the breeding margins are also quite handsome in poultry. This will undoubtedly add more pressure to soybean oil market, where there may be a glut. Therefore, there will be little room for this round of rebounds, and may be frequent fluctuations. The Y2001 contract may hover round the key 6,000 yuan/tonne, unless there is more bullish stimulation. 

The USDA will release its October supply and demand estimates on October 10. According to analysts surveyed by the Wall Street Journal, US soybean production is predicted to be 3.571 billion bushels in 2019/20, with the estimation ranging from 3.473 to 3.634 billion bushels. The USDA sharply cut down its estimate for old soybean stocks in September, and will likely revise downward its soybean inventory this month.