Why Wilmar shouldn't expect too much from China's soybean financing

Its heyday is probably over.

According to Maybank Kim Eng, soybean became a financing tool in China as a means to circumvent the country’s tight credit rules. Maybank noted that for Wilmar, there is no benefit in store from lower domestic soybean price.

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While it is difficult to get a handle on the overall size of soybean financing, some commodity research firms have ventured to suggest that financial soybeans accounted for at least 20-30% of total port stockpiles.

An oversupply of soybeans will lead to lower domestic soybean price, which in turn depresses the prices of end-products such as soybean oil and soy meal.

For Wilmar, there is no benefit in storefrom lower domestic soybean price. This is because it imports itsfeedstock from North and South America but will have to bear the pain of lower end-product prices as it sells them in China.

The group does hedge against soybean price, but it hedges on the Chicago Board of Trade (CBOT) rather than the Dalian Commodity Exchange. That means it can only effectively hedge against international soybean price.

We think soybean financing’s heyday may have passed. Soybean financing seems like an arbitrage business before 2012 but in our view,this kind of almost risk-free business is not sustainable.

As aforementioned, we cited several conditions that made soybean financing very profitable in the past few years, including interest ratespread, rising soybean prices and appreciating domestic currency.