Industrial insiders also said that this round of domestic soybean price hikes was closely related to factors such as the international decrease of soybean sowing areas and the reduction of soybean exports by the United States and other developed countries in favor of the development of biodiesel. At the same time, soybean prices are also influenced by reduction in the output in major domestic producing areas and the rising prices of many commodities.

No power on the market

Early in 2001, more than 50 percent of China's soybean demand could be met by domestic supply. However, with the increasing domestic demand for soybean oil and soybean products, things have changed. According to Lu Yushuang, Deputy Chief of the Production Division of Heilongjiang Agricultural Commission, at present, China's annual soybean demand stands at 45 million tons but only 36 percent can be satisfied by domestic supply.

Predictions from the China National Grain and Oil Information Center indicate that China's soybean imports will increase from 30 million tons in 2007 to 34 million tons in 2008.

Phillip Laney, an American Soybean Association official to China, says that China's soybean imports are likely to continue to rise in 2008 in spite of temporary price intervention measures over major commodities including edible oil adopted by the Chinese Government since January 16, 2008. In his opinion, the increase of soybean imports means an increase of soybean oil and soybean meal, which will help to pull down prices of edible oil and feed soybean meal. Hence China's soybean imports won't be restricted and will increase at the annual rate in the previous years, namely, 8-9 percent.

Precisely because of this, the domestic oil and fat processing industry is more dependent on imported soybeans, and the pricing power of soybeans is completely held by international traders.

Meanwhile, international grain traders have begun to gradually control the domestic soybean market by establishing or acquiring Chinese soybean processing companies.

After a shuffle in the industry in 2004, almost all Chinese processing companies dependant on imported soybeans were wiped out, and there are very few wholly Chinese-owned companies now. While Chinese companies were dealing with the crisis, foreign capital launched a massive attack, finishing market reorganization of oil extracting companies.

"Foreign-owned companies and companies with foreign investments account for over 80 percent in the industry," said Li Guangfu, President of Dalian Huanong Group Ltd., who is planning to sell his oil extracting plant. "Strictly speaking, China's soybean processing industry is controlled by foreign capital."

Policy regulation to be strengthened

At the end of 2007, the Chinese Government announced that from January 1, 2008, it would collect a year-long 5-to-25 percent temporary export tariff on 57 categories of raw grain and flour products such as wheat, corn, rice and soybeans.

This is another attempt of the Chinese Government, after abolishing the tax rebate on over exports of 84 categories of raw grain and flour products from December 20, 2007, to curb rapidly increasing grain exports, expand domestic grain supply and stabilize domestic grain prices by means of taxation.

With these measures restricting grain imports, transmission channels of international grain prices to China are cut off and domestic grain prices will begin to fall. However, Li Quangen, professor at the Nanjing University of Finance and Economics, warns that the transmission of international prices to various countries via futures has surpassed the transmission via commodities on hand. As for China whose imports and exports are not large, it seems that the price transmission mechanism of "Chicago soybean futures--Dalian soybean futures--domestic soybeans on hand--food" has come into being.

Among the main agricultural products in China, it is only soybeans that are mainly dependent on import, and soybean futures are the most synchronous with the Chicago market. On January 21, 2008, the Dalian soybean dominant contract for September stood at 4,736 yuan ($657.78) per ton, but the lowest price of Dalian soybean futures was only 2,452 yuan ($340.56) per ton, almost doubling within 16 months. Price tendencies of Dalian soybeans and American soybeasn are almost the same, continuously rising from July 2007.

At the same time, prices of soybeans on hand in China are increasing synchronously, with the wholesale price surpassing 4,300 yuan ($597.22) per ton. Even after the government launched a series of measures to restrict grain exports, the prices of soybean futures and soybean on hand still remain strong.

The Chinese Government has not taken any intervention measures so far on price transmission of futures.

In order to cope with the impact of imported soybeans, industrial insiders think that the government should strengthen efforts in supplying market information and establishing soybean reserves.

The government should set up an accurate and timely information network. Zhou Youjin, an expert long engaged in soybean industrial research, says that multinational grain traders have monopolized agricultural produce on the global market and own information advantages throughout the world. If domestic companies bought raw materials from those multinational grain traders, authenticity and timeliness of the information would lag behind and Chinese companies would inevitably be under control of multinational grain traders. Therefore the Chinese Government must strengthen the establishment of information channels and improve information guidance so that the whole soybean industry can acquire accurate and timely information on the situation, and farmers can timely readjust sowing varieties and areas. This is a problem that needs an urgent solution.

An appropriate volume of soybean reserves also needs to be established. According to Liu Zhaofu, the government should purchase large quantities of soybeans when the market price is low and sell them when the price is high to stabilize the market. At present, China's soybean reserve is not large enough and most of the reserve is in the form of inventory by companies, which is estimated to 3 million tons, capable of satisfying the nation's processing demand for only 20 days.