Before the Spring Festival, the most important festival for the Chinese, counters selling soybean oil in a supermarket in Beijing's Chaoyang District were especially crowded. "Since September 2007, soybean oil has sold very well," Li Ping, a sales assistant of the supermarket, told Beijing Review. "More than 1,000 bottles are sold every day."

Vigorous demand for soybean oil should have been the best news for producers, but the reality is entirely contradictory.

Tian Renli, General Manager of Jiusan Oil and Fat Co. Ltd., the largest vegetable oil processor in northeast China, says that although prices for soybean oil have risen a lot in the past year, it is still difficult for oil producers to gain profits. This leads many Chinese oil processing companies whose major raw material is soybeans into difficulty. "Soybean prices are the real lifeblood of oil processing companies," Tian said.

In Heihe, the major soybean-producing area in Heilongjiang Province, the purchase price of soybeans on hand is 4.1 yuan ($0.57) per kg, but farmers are still reluctant to sell. In early 2007, the purchase price of soybeans on hand was only around 2 yuan ($0.28) per kg.

At present, China's soybean production capability can only meet one third of domestic demand, so Chinese oil processing companies are relying more on imports. However, the pricing power is completely held by international traders. According to the statistics released by Dalian Commodity Exchange, China's largest exchange of farm produce futures, the present CIF (cost, insurance and freight) price of soybeans imported by Dalian stood at $580 per ton, while it was only $310 per ton in early 2007.

Short supply of soybeans appeared two years ago, but since soybean prices on the international market were lower than those on the domestic market at that time, large volumes of imports made up the demand for domestic oil processing companies.

But in 2007, soybean prices on the international market hit record highs and domestic output dropped sharply, leading to severe shortages of soybeans. Experts say that the government should set up information networks on the supply and demand situation as well as prices for soybeans and secure soybean reserves in an appropriate volume.

Multiple factors for price hikes

Heilongjiang Province and the east part of the Inner Mongolia Autonomous Region are the country's major soybean-producing areas. Particularly, Heilongjiang Province produced one third of China's soybeans. In recent years, because earnings from planting soybeans are lower than those from planting rice and corns, the sowing area of soybeans in northeast China has decreased year by year.

According to figures from www.dadou.cn (China soybean net), the sowing area of soybeans in Heilongjiang Province in 2007 dropped by more than 667,000 hectares from 2006 and that of east Inner Mongolia shrunk by about 73,330 hectares.

In 2007, drought in the major producing areas exacerbated production problems. Estimations based on a survey carried out by the National Bureau of Statistics show that the total soybean output in Heilongjiang Province in 2007 was around 4.91 million tons, a decline of 1.82 million tons from the previous year. A survey of www.dadou.cn indicates that the total soybean output in east Inner Mongolia in 2007 was 878,000 tons, dropping 473,000 tons from 2006. The grain department of Heilongjiang Province predicted that the country's total soybean output in 2007 would stand at 14.4 million tons, 9.81 percent lower than that in 2006.

Liu Zhaofu, general manager of www.dadou.cn, says that reduction of soybean output has influenced prices of soybean oil, especially in the major production areas.

However, in Liu's opinion, even if soybean output in the production areas had increased, it wouldn't relieve the domestic market, since this round of price hikes was mainly driven by prices on the international market. The rising domestic consumer prices also pushed up soybean prices at home.