Soybeans Signal Slowing Inflation In China



Soybean prices have been falling precipitously in the last month.  See the chart to the right.Earlier this morning, Goldman Sach’s grain analyst Damien Courvalin cut his 3-month, 6-month, and 12-month targets for soybean prices.  He expects $12.60/bushel, $13/bu, and $13/bu, respectively, down from his previous forecast of $13.75/bu, $14/bu, and $14/bu.

Courvalin also noted, “Interestingly, the recent collapse in soybean prices will potentially have a beneficial impact on Chinese inflation as local food inflation and CBOT soybean prices have exhibited a strong correlation over the past few years.”

Bloomberg Brief Economist Michael McDonough also expects food inflation to slow.  He offers this chart which overlays Chinese food CPI with Bloomberg’s Chinese daily food price index:

China Food Prices

Photo: Bloomberg Brief

Morgan Stanley’s Stephen Roach welcomes the developments as good news for China:

Inflation is always a serious risk in China – especially with headline increases in the country’s Consumer Price Index surging through the 6% threshold this summer. The government has responded forcefully on four fronts.

First, food inflation, which accounts for about half the recent run-up in overall prices, has been addressed by administrative measures aimed at cutting fertiliser costs and removing bottlenecks to increased supplies of pork, cooking oil, and vegetables. Second, in an effort to curtail excess bank lending, reserve ratios were increased nine times in the past 11 months. Third, the rate of currency appreciation has edged up. Finally – and perhaps most importantly – the People’s Bank of China has raised its benchmark policy rate five times since October 2010. At 6.5%, the one-year lending rate is now 0.3% above August’s headline inflation rate.

If food inflation recedes further, and the headline inflation rate starts to converge on the 3% core (non-food) rate, the result will be the equivalent of “passive monetary tightening” in real (inflation-adjusted) terms – precisely what the inflation-prone Chinese economy needs.

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