Chinese soybean imports will drop as processors cannot cover their costs with a bird flu outbreak sapping demand for the animal feed ingredient they make.

Imports to the country, which typically buys 60 percent of the oilseed traded in the world, could fall below 15 million tonnes in the third quarter from 18.25 million in the same period last year, traders and industry officials said.

That would likely cap a rally in global prices as it would coincide with bumper supplies from Brazil and Argentina hitting the market.

Chicago Board of Trade front-month soybeans edged lower on Thursday after climbing to their highest since July in the last session when the U.S. Department of Agriculture cut its forecast for ending stocks.

"If you crush beans in China today you lose $80-$100 a tonne," said a Singapore-based senior executive with a global trading company that has processing facilities in China.

"This is really discouraging people from buying beans and we expect the real impact will be felt in the third quarter."

China's stocks of soybeans, crushed to make cooking oil and animal feed ingredient soymeal, have swelled due to soaring imports in the last few months.

China imported 15.35 million tonnes of the oilseed in the first quarter, up 33.5 percent on a year earlier, according to official Customs data issued on Thursday. Imports in March were 4.62 million tonnes, marginally lower than 4.808 million tonnes shipped in February.

But demand for soymeal has been hit by outbreaks of bird flu, as well as falling pork prices, cutting appetite by as much as 20 to 30 percent in the February-March period, analysts said.

As a result, soybean importers have cancelled up to 600,000 tonnes of South American soybean cargoes for shipment between March and May, trade sources said last month.

The country has also cancelled around a million tonnes of U.S. corn, also used to feed animals, citing the presence of an unapproved genetically modified strain. But trade sources say the clampdown is being used to shield farmers from the supply glut and weak prices.

An outbreak of bird flu in southern Guangdong province in January forced chicken farms to scale back on restocking, following huge losses last year after the culling of millions of birds.

State Reserves Sale?

Plans by Chinese authorities to sell state reserves in May could add to the glut in soybean supplies, further denting imports.

"The government may try to sell as much as possible," said an industry analyst with an official think-tank. "The government is ending its soy stockpiling programme this year and shifting to target prices."

Beijing will have stockpiled more than 3 million tonnes of domestic soybeans this crop year when the programme ends in April. It also holds 2-3 million tonnes from the 2011 harvest and 800,000 tonnes from the 2012 harvest, analysts said.

Crushers are losing 500-600 yuan ($81-$97) for processing a tonne of soybeans, compared with a 600 yuan profit in the fourth quarter of last year during peak consumption and when some shipments were delayed.

The fat margin in the fourth quarter prompted China to purchase 27.7 million tonnes of U.S soy so far in the current marketing year to August, 2014. China bought a total of 21 million tonnes of U.S. soybeans the year before.

In addition to the purchases from the United States, Chinese buyers have also booked more than 20 million tonnes of new-crop South American beans.

($1 = 6.199 yuan)