Wednesday, November 9, 2011

How a Drop in Soybean Prices May Save the World Economy

Sharp-eyed readers may recall that I was dubious of Goldman's short term bullishness on beans back in September. While that skepticism was warranted the squid nailed the longer term weakness and the macro effects.
See: Comodity Softs: "Goldman sides with soybeans, but Rabo prefers corn".

On November 4 The Pig Site was reporting:
Pork Prices Driving Inflation in China
 The price of pork has risen so much in China that now it is the only driver of inflation in the country according to analysis by the Danish pig meat processor, Danish Crown....MORE
Today Agrimoney says:
China pork price fall fulfills Goldman soy prophecy
A reversal in Chinese pork prices – which fulfilled a Goldman Sachs prophecy derived from US soybean futures – looks unlikely to gather momentum, thanks to the strong demand for the meat and soaring hog values, meat group Zhongpin said.

China's annual inflation rate slid to 5.5% last month from 6.1% in September, in part thanks to a pullback in the rate of increase in pork prices from levels above 50% earlier in the year.

Annual pork price inflation eased to 39% from 44% in September, with prices actually declining by 6.4% since mid-September, according to China's Ministry of Commerce.... 
...Chicago soybean link 
The slip back in Chinese inflation also appears to fulfil a forecast from Goldman Sachs following September's collapse in prices of US agricultural commodity futures, and in particular those of soybeans, of which China is the top importer, to provide feed for its huge hog herd.
"The recent collapse in soybean prices will potentially have a beneficial impact on Chinese food inflation, which represents close to a third of the Chinese consumer price inflation," Goldman analyst Damien Courvalin said on September 30.
"China has to import soybeans at Chicago prices, generating a strong dependency between local food prices and Chicago soybean prices," he said, noting a "remarkably strong correlation" between Chinese food prices and Chicago soybean prices, in yuan terms.
"Should this relationship continue to hold, the recent collapse in soybean prices and our expectation for continued lower prices suggests that Chinese food inflation could ease soon."....MORE
Which lowering of inflation leads to (Reuters via Yahoo): 
China inflation, output create room for pro-growth steps
Chinese industrial output grew at its weakest annual pace in a year in October and inflation fell sharply, raising expectations Beijing will do more to support economic growth by "fine tuning" policy.
A flurry of data on Wednesday showed that China's factories are bearing the brunt of a modest economic slowdown even as consumer spending and investment in assets such as roads and other infrastructure remain resilient.

China's annual inflation rate fell to 5.5 percent in October from September's 6.1 percent -- the biggest drop in the annual rate from one month to the next since February 2009 -- and a further pullback from July's three-year peak of 6.5 percent.

Premier Wen Jiabao said prices had fallen further since October, adding to the view that the State Council will start to favor more pro-growth policies, although inflation is still too high to expect a quick cut in interest rates from the People's Bank of China (PBOC).

"All of this suggests that the balance of risk for the PBOC and State Council is likely shifting to growth and away from inflation," Tim Condon, head of Asian economic research at ING in Singapore, said....MORE
Et voila, an engine to pull Europe out of the swamp (or not)

Of course not everyone is pleased by the more affordable prices: farmers, long-only index investors, prisoners...
Florida Prisoner Suing Over 'Cruel And Unusual' Soy-Based Meals