BEIJING/SINGAPORE — China’s soymeal futures soared to record highs last week on concerns about the scale of South America’s drought-hit soybean crop and tightening meal supplies in domestic markets.

Elevated prices of soymeal, the top protein ingredient in animal feed, could lift production costs for Chinese hog farmers who are already struggling with huge losses, and may push some to exit the market, traders and analysts said.

The most actively traded soymeal futures on the Dalian Commodity Exchange rallied to 3,792 yuan ($596.22) per ton this week, the highest price on record, and up 13% from before the week-long Chinese New Year holiday.

Worries about how smaller South American crops will tighten the global soybean balance was the main driver behind the meal rally, although tightness in the domestic meal market was also supportive, analysts and traders said.

“Soybean imports in the second half of last year were low, and importers were waiting for margins to improve,” said Darin Friedrichs, co-founder of agricultural research firm Sitonia Consulting. “But now there are production issues. US futures have rallied a lot, and Dalian meal is playing catch-up,” Friedrichs said.

Chinese importers had been counting on abundant and cheap soybean supplies from Brazil to start arriving this month and fulfil their needs for the first quarter of 2022. But the South American crop issues have now caught some off guard. “Crushing plants aren’t receiving sufficient cargos,” said a manager based in southern China with a top crusher. “We did not make much purchases earlier as margins were low,” said the manager, who declined to be named because of the sensitivity of the issue.

Strong international soybean prices alongside relatively weak domestic soymeal prices since mid-2021 have pressured crushing margins in China, and most crushers faced hefty losses late in the year. Margins have recovered to positive territory this year, but remain well below the long-term average, stifling crusher appetite for soybeans.

“Crush margins are bad and crushers aren’t motivated (to crush),” said a feed ingredient purchase manager in Shandong, a major processing hub in eastern China. Cash prices of soymeal in the district jumped about 10% to more than 4,000 yuan per ton this week because of tightening supplies after a protracted stretch of low crushing activity, according to the manager.

“If hog margins are terrible, (crushers) they don’t want to have huge stocks of soy meal because farmers might leave (the industry) and they could have trouble selling the stocks,” Friedrichs said.

Some have already left, after months of negative margins last year and widening losses in 2022. Farmers in Shandong, a major hog producer, were losing 288 yuan with each pig raised this week. The woes are expected to continue as China entered the traditionally weak consumption season after the Spring Festival holiday while meal prices push higher.

“If soymeal prices remain high, it will increase farming costs, pushing more farmers — big and small — to further cut production capacity,” said Li Ming, analyst with the agriculture section of Mysteel, a China-based commodity consultancy.

China’s sow herd was 43.29 million head at the end of December, down 2.9% from the previous quarter, according to official data.

“It is too much. Soymeal prices rose more than 500 yuan per ton after Spring festival,” said a manager with a feed producer in the northeastern region, declining to be named because of the sensitivity of the issue. “The end users can’t take this. Farmers can’t afford the losses any more, especially the smaller and medium ones, they had been losing since last year,” he said. Reuters