China soybean meal stocks build as spot basis stays discounted

In July, China's soybean meal prices generally followed the strength in the overseas market, with weakness in the domestic market capping the momentum. Overseas, the CBOT soybean futures rallied steadily, driven by weather premiums, bullish USDA reports, and expectations of Chinese purchases. However, domestic spot prices saw limited gains due to persistent inventory accumulation and subdued demand, with spot basis remaining in the negative.

The core driver of China's soybean meal price hike in July came from the overseas market. The July USDA supply and demand report showed soybean data featuring "noticeably tighter old-crop balance sheets and neutral-to-slightly-bullish new-crop figures", breaking previous market expectations of loose old-crop supply and providing direct support to soybean prices. Meanwhile, high temperatures and drought conditions in major U.S. soybean-producing areas continued to threaten crops in their critical growth stage.

Although the good-to-excellent rating of soybean recovered slightly for two consecutive weeks, regional variations remained pronounced, keeping the market highly vigilant toward weather risks. Additionally, continued Chinese purchases of U.S. soybeans provided extra support.

Driven by these multiple bullish factors, the CBOT soybean November contract posted a maximum gain of over 5% in July. However, the cost-driven rally from overseas weather premiums was moderately diluted by the weak domestic supply-demand fundamentals. Recently, a sharp pullback in U.S. soybean prices from elevated levels exerted dual pressure on costs and sentiment, prompting the main DCE soybean meal contracts to see sustained significant position reductions and accelerated fund exits.

Nonetheless, with limited spot available for sale in China's soybean meal market toward month-end, sellers showed little willingness to cut prices aggressively. Soybean meal spot prices therefore fell less than futures, and basis instead showed a relatively firm adjustment trend.

On the domestic supply side, soybean port arrivals remained at elevated levels. According to Mysteel's survey, soybean arrivals in July at full-sample domestic crushing plants were estimated at approximately 10.6405 million tonnes, with August projected at 10.5 million tonnes and September at 9.3 million tonnes, indicating extremely ample soybean supply.

As the core crushing region, East China saw arrivals of about 2.1125 million tonnes in July, with crushers maintaining high operating rates. According to Mysteel's survey of national full-sample crushing plants, actual soybean crush volume in the week ending July 24 reached 2.344 million tonnes, with an actual operating rate of 64.54%. The next session is estimated to see crush volume of 2.4445 million tonnes and an operating rate of 67.31%.

Driven by high crushing volumes, soybean meal inventories accelerated their build-up. According to Mysteel's survey, national soybean meal stocks at crushers rose to 967,300 tonnes as of July 24, up 67,600 tonnes or 7.51% week-on-week. Among these, 21 East China crushers held 414,000 tonnes of soybean meal inventory, down 8,000 tonnes from the previous week but up 11,000 tonnes year-on-year.

East China was primarily affected by typhoon weather and unforeseen events, which delayed, but did not reverse, the ongoing inventory accumulation pressure and expected pace. Spot soybean meal prices in the region remained relatively inelastic, largely moving in passive tandem with futures, while the basis maintained a deep discount, reflecting sustained digestion of the futures premium by the spot market.

July soybean meal regional price performance showed strength in the North and weakness in the South, with East China performing relatively firmly. The main reason was robust outbound shipments and pick-up activity in the East China region.

During the period, spreads between parts of the Yangtze River basin and East China even inverted, reflecting East China's role as a regional distribution hub when supplies were able to flow to higher-priced surrounding areas, providing some price support. However, these spread changes could only marginally divert East China inventories and could not reverse the overarching trend of regional inventory accumulation.

On the demand side, the summer season marks a slack period for livestock farming. Hog farming continued to incur losses, with weak restocking appetite; only poultry feed provided rigid support, while rapeseed meal extensively substituted soybean meal in the aquatic feed sector.

As of July 24, average physical soybean meal inventories at national feed mills stood at approximately 7.57 days, down 0.62 days year-on-year. Downstream buyers held a consistent expectation of ample future supply and maintained a "buy-as-needed" procurement strategy, with no concentrated stockpiling. While rigid demand provided a clear floor for consumption, it lacked incremental growth momentum.

From the perspective of crushing margins and demand, persistent deterioration of crushing margins directly weakened domestic soybean buying interest, with soybean forward-month procurement progress significantly lagging behind historical levels for the same period, pointing to a potential marginal tightening of future supply.

In summary, the July East China soybean meal market passively followed overseas price gains. Limited spot soybean meal price increases and a weakening basis reflected the constraints of ample supply. Domestic soybean arrivals in August are still expected to remain above the 10-million-tonne level, and it will be difficult for Yangtze River basin crushers to significantly reduce operating rates. East China inventories will likely continue to accumulate modestly. Regional price spreads are expected to remain range-bound with narrow fluctuations, and the space for destocking through interregional trade is extremely limited.

However, continued deterioration of crushing margins may lead to a marginal decline in operating rates, offering the possibility of a phased alleviation of supply pressure. East China soybean meal spot prices are expected to continue their range-bound performance in August, with the basis likely to maintain a discount structure. While overseas weather news will provide brief sentiment-driven spikes, it is unlikely to change the underlying pattern where the spot market is well-supplied. Key factors to monitor include the pace of Chinese soybean procurement, the impact of crushing margin changes on operating rates, and the rhythm of inventory accumulation.