The Soybean Market: A review of the news in 2001   Published on January 7, 2002

Overview

Soybean and soymeal demand held strong at the beginning of the year as livestock producers worldwide quickly switched from meat and bone meal (MBM) to soybean meal because of concerns over mad cow disease. China, the world largest buyer of soybeans, suddenly disappeared from the market towards the middle of the year. This had a severe impact on prices. Confusion surrounding China's GM labeling scheme initially created a hurdle for buyers, then subsequently led to stalled shipments for those who did make purchases. In the final weeks of the year, lengthy negotiations between the U.S. and China led to an interim accord, allowing trade to resume. Although China returned to the market, Argentina was effectively removed from participating in its domestic market when its economic woes compounded, leading to a full-blown economic crisis in December.

2001: In review

January

Fishmeal producers in Chile were expected to benefit from the onset of mad cow disease in Europe. In early December, the European Union (E.U.) agreed to ban the use of meat and bone meal (MBM) in animal feed and authorized the destruction of any feed containing MBM. Contrary to expectations, the use of fishmeal was authorized for swine and poultry feed. However, it was agreed that it could not be used as feed for ruminants. The measure was imposed for six months initially, after which a review was to be undertaken.

The first confirmed case of mad cow disease in Italy since 1994 proved to be devastating news for its cattle and meat-based feed industries. However, the news was widely expected to boost demand for vegetable proteins. Feed industry officials predicted that the use of cereals and other vegetable proteins (such as soybean meal) in feed would rise in 2001, after the authorities banned the use of MBM in feed for herbivores. Industry sources estimated that the use of domestically produced MBM in Italy stood at around 350,000-400,000 tons per annum.

Traders forecast that Italian farmers would likely increase the input of cereals and other vegetable proteins for pork and poultry feed, including high-protein soybean meal, rapeseed and sunflower meal and corn gluten, as consumers began spurning beef. Traders felt that the main beneficiary of this would be soybean meal exporters from the United States and South America.

February

The BSE crisis that had been sweeping through Europe managed to transform the hitherto gloomy prospects for Monsanto, the controversial GM giant. The Europe-wide ban on feeding meat and bone meal to animals led to a huge increase in imported GM soybean meal to take its place. Monsanto's share priced had started to soar by February, and analysts who had once shunned the stock began recommending it as a 'buy'.

The fishmeal industry worldwide was expected to lose at least $ 32 million in exports to the E.U. in light of the six-month temporary ban imposed by the E.U. in January on the use of fishmeal in ruminant feed. This ban threw the fishmeal market into turmoil, according to the International Fishmeal & Oil Manufacturers Association (IFOMA).

March

Regularly quoted within the European food and feed sectors as a major source of GMO-free soybeans, Brazil announced that it was likely to approve the release of GM seeds and food products, following a new 'provisional measure' (number 2137) adopted during the final days of 2000. The measure provided the base upon which a new authority, the National Technical Commission on Biosafety (CTNBio) would be to approve the use of GMOs in Brazil. Consumer groups vowed to contest the development in Federal Court.

April

Japan's Agricultural Ministry announced that it would introduce mandatory safety checks to guard against imports of unapproved genetically modified (GM) crops for animal feed following a recommendation by a government panel.

May

China's aquaculturists said that the success of the country's $ 47-billion fishery industry lay in soybeans. The move from fishmeal to soybean meal in China's fishing industry prompted a U.S. industry body to predict that demand for soybean meal could double in four years, during which China's fishing industry would grow into the world's largest. The American Soybean Association's Phil Laney said that although China's fish farmers weren't originally using soybean feeds, it had become the fastest growing source of feed demand. He added that this was driving demand for soybean meal.

June

China announced new regulations requiring safety certification for GMOs in agriculture on June 6, but the information provided on the new measures was described as "vague". An example of this was that some agencies that were cited as being in charge of administering the new regulations had not yet been set up at the time of the announcement. Beijing said the measures announced were a framework, and that details would be released at a later date. However, most traders were unwilling to sign new import contracts, particularly those made on or after June 6.

July

Demand for soybean meal in the E.U. had increased by July. The E.U.'s ban on MBM, as well as fish-based meals, led livestock operators to the main alternative - soybeans. Demand for soybean meal in the E.U. at this time was predicted to jump to 3.5 million tons by the end of 2001. However, the E.U.'s sentiments with regard to GM food imports had created some controversy at this time.

China's Ministry of Agriculture received a warning from the U.S. in July against attempts to limit imports of genetically modified (GM) soybeans, noting that such a move could trigger trade disputes and become an obstacle to China bid to join the World Trade Organization (WTO). The U.S. said that any accusations with regard to the safety of genetically modified soybeans had yet to be proven, and that limiting imports would drive up prices of local soybeans, while pressuring world soybean prices. This would lead to severe supply shortages for local oilseed crushers. The U.S. cited its own situation in a report. The report said it would cost $ 50/ton to label, obtain safety certificates and pay quarantine costs if the U.S. separated its GM and non-GM soybeans. Since the U.S. doesn't separate its GM and non-GM soybeans, the fees were kept to just $ 18-20/ton, the report said.

In an attempt to mimic a devaluation, Argentina implemented a dual exchange rate for its currency, the peso. This offered a subsidy for exporters and a tariff for importers. Concerns that this was a first step towards full-scale devaluation sent prices of the country's bonds tumbling, leaving the entire economy with the jitters. The country finally ran out of credit and had to reduce its deficit to zero immediately in order to avoid a default on its debt. The government instantly issued an executive order to cut spending by 13 per cent across the board, including salaries and pensions.

Brazil

Brazil asked the WTO to investigate the U.S.' farm subsidy obligations under the WTO.
Brazil was concerned as to why the U.S. had failed to respect its WTO subsidy levels for its soybean farmers. Pedro de Camargo Net, head of the Brazilian Agriculture Ministry's secretariat, argued that the U.S. policy on support for soybean farmers had resulted in a steady increase in subsidies in recent years, and was "completely against what the American standpoint is on free trade in agriculture".

The E.U. formulated a new provision requiring labels for all foods derived from any GM crop. However, the U.S. argued that Europe's new rules on food derived from genetically modified crops was unworkable and would be a barrier to trade that would ultimately lead to considerably higher prices for consumers.

American Soybean Association (ASA) President Bart Ruth and U.S. Soybean Board (USSB) Chairman Doug Magnus traveled to China in August to establish exactly when the new GMO rules on soybean imports would be implemented and to clearly define the implementation procedure. Both the ASA and USSB wanted to make sure the new rules did not leave any room for ambiguity.

Following China's lead, Japan announced that it too would not allow feed with more than one per cent of unapproved GMO soybeans to be sold within the country. The new rule will become effective early 2002. However, the Japanese Ministry of Labor and Welfare said it was not keen on setting similar rules for food for human consumption.

Chinese demand had a heavy hand on prices. Talk of accumulated soybean meal inventories in China, the absence of the Chinese from the market, in addition to cancelled export sales from China resulted in a drop in confidence among sellers, and led to lower prices for buyers.

September

Brazil decided to challenge the U.S.' subsidy policy on soybeans. Brazil claimed that the U.S. had failed to respect its WTO subsidy caps for soybean farmers. Brazilian soybean producers calculated that soy prices ought to have been 30 per cent higher on the world market than the prices been offered if it weren't for U.S. subsidies, which reimburse soy farmers' production losses and guarantee to cover differences between production costs and lower market prices. Recently, Brazil asked the WTO to convene a panel to determine if the subsidies violate 1994 Uruguay Round free-trade pact.

The Chicago Board of Trade (CBOT) suddenly closed September 11-12, due to the terrorist attacks on New York and Washington D.C., creating confusion in soybean markets worldwide. A Paris-based grains trader said that trading virtually came to a standstill because CBOT prices are the driving force for their markets. Traders in Japan waited until CBOT opened again before resuming trading. A Singapore-based trader said there was no price discovery mechanism without CBOT.

Economists and traders were scratching their heads in dismay trying to figure out the effects of the terrorist attacks on the market. The day after the Japanese bombed Pearl Harbor, U.S. cash soybean prices rose by an average of 2.3 per cent. When the Gulf War broke out between the U.S. and Iraq, soybean prices rose by 6 ? cents. On the first day's trading on CBOT following the World Trade Center bombing, the November soybean futures contract shot up 12 cents to $ 4.82.

In Japan, major feed makers were ordered to suspend the use of MBM in poultry and pork feed, following Japan's first suspected case of mad-cow disease. Feed makers decided to end the use of protein-rich materials in poultry and pork feed to minimize the chance of it being privately mixed with other products and fed to cattle. This incident was expected to stimulate demand for soybean and soybean meal in Japan as farmers and meal producers' turned to vegetable-based meals.

With approval gained for its accession into the WTO, many nations expect China to increase its agricultural imports. With China's population at 1.3 billion, the U.S. certainly feels that free trade will benefit its agricultural exports. Imports of soybeans were expected to take place more freely because the country is usually facing a supply shortage. However, many parties feel that Beijing could set up hurdles to protect its hundreds of millions of farmers from a flood of imports. China's GM labeling requirements led to more difficulties than expected during 2001. U.S. grain exporters said Chinese crushers who had purchased American soybeans were requesting shipments to be rescheduled. Some even wanted to cancel contracts because of delays at Chinese ports. China's new quarantine rules were the cause behind delays in vessel berthing and the unloading of cargoes. Some think that there seems to be some kind of indirect pressure on crushers to scale back their imports in order to support the domestic market.

The E.U. voted in September that it would not accept a proposal to require labeling on GM derivatives, or processed foods made with GMOs. On the same day as the E.U.'s announcement, however, Japan announced that biotech food labeling would be mandatory on 24 foods made from soybeans as of April 1, 2001.

October

The U.S. House of Representatives was scheduled to consider the House Agricultural Committee's farm bill. The proposed bill shifted spending from commodity programs and income support to conservation and land retirement programs. If enacted, the bill would reward farmers for significantly reducing planting acreage. Traditionally, soybean growers received the majority of farm subsidies. Therefore, lobbyists for grain farmers tried to halt the effort by Congress to shift billions of dollars in crop subsidies into programs that pay farmers for retiring land and improving environmental practices. Soybean growers believe that they would face economic and environmental pressures on their farms if the bill were to be passed.

Thailand's growing chicken industry led the Thai Cabinet to approve a 300,000-ton increase in soybean imports for 2001, lifting the quota to 1.5 million tons. Soybeans imported under the MAV were excluded from tariffs, while imports from outside the MAV scheme were subject to a tariff of 84.5 per cent.

In China, failure to resolve the issue of GM labeling regulations led to further delays and cancellations of soybean imports. The U.S. warned that if China failed to resolve this issue, President George W. Bush would lodge a formal complaint with China's leaders in Shanghai during the October 20-21 summit of the Asia-Pacific Economic Cooperation (Apec) meeting. Following the Apec meeting China agreed to implement guidelines on the importation of GM soybeans. However, at that time they had not yet indicated when they would produce the detailed regulations.

In Japan, a second case of mad cow disease was identified. Japanese soybean importers expected an increase in domestic soybean consumption. In the short run, importers expected lower demand for soybean meal in correlation with lower demand for livestock. However, in the long run importers expected that as consumers resumed eating beef, there would be an increase in demand for soybean meal.

November

U.S. diplomats handed over papers to China certifying that GM soybeans had been approved for use in the U.S. and that they did not pose a hazard to humans, animals or the environment. However, an official at China's Ministry of Agriculture said that China would wait and see whether the U.S. document was in line with the requirements of China's GMO regulations. The official said the office had yet to receive any documents from the U.S.

Brazil announced that it was preparing two new disputes against the U.S. in the WTO concerning subsidies in the export of soy and the abuse of antidumping practices. The Brazilian government hired the law firm Powell, Goldstein, Frazer and Murphy from Washington to fight for its interests. Brazil claims $ 1-billion worth of its exports are impacted per annum. If Brazil were to win the case, world soybean prices would increase substantially.

Japan confirmed a second case of mad cow disease, which deepened a health scare that experts said might turn the Japanese away from beef for years. The food scare saw Japanese beef sales tumble 70 per cent over recent months. Although no one died or fell sick since Japan's first case was reported, it was reported that it could take years before confidence in beef recovered in a society that traditionally preferred to rely on fish as its chief source of protein. A recovery in domestic beef sales would be slow, according to experts. They said that it could take more than three years before beef sales fully recovered. Therefore, Japanese soybean meal demand was expected to decrease initially as beef producers consolidate. However, demand was expected to increase in the long run as producers replaced animal protein with soy protein in livestock feed.

December

Robert Zoellic, the U.S. Trade Representative, announced an interim accord between the United States and the People's Republic of China in December 2001 that provided for the resumption of soybean exports from the United States to China. In a November 26 letter, China confirmed it would accept the use of U.S. and other foreign certificates as a basis to admit U.S. soybeans into China until China's new biotechnology regulations were implemented. This agreement is to remain in effect until China implements its new biotechnology regulations. China did not announce a timetable for the implementation of these regulations. However, the U.S. sent a trade representative to China mid-December to discuss the issue.

Argentina, the world's third largest exporter of soybeans, was expected to devalue its currency last month, which was pegged one-for-one to the U.S. dollar, as it battled to avoid defaulting on $ 132 billion in public debt. The situation in Argentina has continued to deteriorate into the New Year as the country's fifth president in two weeks sought support today for a painful devaluation. Last month, one dealer said that the instability could indirectly prompt more selling of soybeans and less crushing of meal and oil. Crushers usually receive refunds from the government for value added tax (VAT) they have paid, but they may now decide it is too risky. With more beans on the world market, this could lead to a more bearish scenario, leading to lower prices for beans, while price of soybean meal and other soybean products would increase.

FoodMarketExchange.com will continue to monitor the situation unfolding in Argentina, and will continue to update you in our regular weekly market reports.

2000-2001 Prices

Source: FoodMarketExchange.com