China’s Bird Flu Poses Downside Risk To Global Soybean Prices

We see growing downside risks to soybean prices as a result of the spread of the recent avian flu outbreak in China. We believe the amount of affected poultry farms could be largely underestimated, as infected birds with the H7N9 virus (a lesser-known variant of H5N1) show no obvious symptoms and are able to silently spread the disease – making it difficult to locate affected farms. Consequently, the virus could have reached an extended number of provinces. Cases have already spread beyond Shanghai’s nearby provinces and reached Henan and Beijing, several hundred kilometers to the north.

The epidemic is likely to have an impact on China’s soybean demand and imports in the coming months, putting downward pressure on global soybean prices. Indeed, China typically imports almost two thirds of the world’s traded volume of soybean and is a key driver of prices. The spread of the virus amongst the country’s poultry farms could prompt the government to swiftly step up its measures to contain the disease and order massive culls, dragging down livestock production prospects and ultimately reducing soybean demand and imports in 2012/13 and 2013/14. In fact, soybean consumption and import growth slowed in 2003/04 and 2006/07, following outbreaks of the H5N1 virus in 2004 and 2006. More specifically, a severe epidemic in early 2004 that hit the whole Asia region saw an aggressive response by the Chinese government, which ordered the culling of 120mn chickens (or around 1.5-2.0% of the total domestic chicken headcount) and the quarantining of farming areas.

Even if the virus is quickly contained, lower consumer confidence in poultry products is likely to reduce poultry meat consumption, prompting farmers to reduce headcounts. The overall impact on China’s feed demand could be all the more significant for soybean prices given that the bird flu outbreak follows an incident in March in which thousands of dead pigs were found floating in Shanghai’s main river. This has already reduced Chinese consumers’ trust in domestically produced meat and sent pork prices down 14% in less than a month.

Fundamentally, the soybean market remains the tightest among other grains. As a result, we believe soybean prices will remain supported in the medium term in spite of potentially lower than expected imports from China. Depleted stocks and delays to the South American harvest reaching export markets are likely to maintain the global market in a very small surplus of 300,000 tonnes in 2012/13. Beyond that season, subdued production growth in major soybean producers and the rebound in China’s soybean demand resulting from the recovery in the livestock sector will prevent the market from returning to significant surpluses, dragging down stocks-to-use ratios in the coming years. This underpins our view for prices to average higher in 2013 compared with 2012, at USc1,480/bushel, and to remain elevated in 2014, averaging USc1,450/bushel over the year.

Further analysis of Asia’s agricultural sector is available to our subscribers in our Commodities service in Business Monitor Online.

This Week’s Trivia Question

Our previous trivia question was about Somalia. Our questions were, which relatively famous Somali played a character that tried to kill Captain Kirk in one of the later Star Trek films? And, on a semi-related note, which short-lived US TV series of recent years had an episode in which one of its main characters, who was played by an actor who plays a colleague of Captain Kirk elsewhere, visits a remote region of Somalia? (Hint: the actor was born in a country that is currently being threatened with war by its much poorer neighbour.)

The answer to the first part of the question is the model Iman, who was born in Somalia, and played a shape-shifting alien in Star Trek VI. The answer to the second part is the ill-fated TV series FlashForward. In one particular episode, several characters visit Somalia to investigate some mysterious pylons believed to be able to cause mass blackouts of crows and people. One of the main characters was played by John Cho, a South Korean-born actor who plays Mr Sulu in the new Star Trek films.

This week’s question is much more straightforward: which city’s police force recently added a Lamborghini to its patrol car fleet? Hint: it is a generally wealthy place currently recovering from a major property market-induced financial crisis a few years ago. And, which country was the previous one to add a Lamborghini to its police fleet?