Demand for soybeans in China could pick up following defaults on cargoes in April, but it will take several months for processors to come out of the red with near record imports and overflowing silos keeping a lid on prices.
Rising prices for pork and poultry products have buoyed hopes of better margins for crushing soybeans, which are often used to make animal feed ingredient soymeal.
Importers in China, which buys nearly two-third of soybeans traded in the world, defaulted on at least 500,000 tonnes of soybean cargoes, the biggest in a decade, as buyers struggled to get credit amid losses in processing beans.
Signs that China's appetite for soybeans is recovering could add fuel to a rally in benchmark Chicago futures, which jumped to a 10-month high last week on the back of tight U.S. supplies and strong demand.
"It will take some time before things get back to normal," said one Singapore-based senior executive at a global trading company which supplies beans to China.
"They are still looking at huge arrivals and buyers have no choice but to accept these boats," he said, declining to be identified as he was not authorized to speak with media.
China's soybean imports in May and June could climb to near record highs of 6 to 7 million tonnes a month after January-April purchases jumped 41.2 percent from a year ago to 21.85 million tonnes.
That would bring totals in the first half of 2014 to around 34 million tonnes, 26-percent higher than a year ago, traders and industry officials said.
The surge in imports came as demand from the livestock industry slowed amid falling pork and poultry prices. But pork prices have been picking up on the back of government stockpiling, while appetite for chicken and eggs looks set to grow as memories of a bird flu outbreak fade.
China's soybean stocks at major ports have climbed to 6.8 million tonnes, according to consultancy Shanghai JC Intelligence (JCI), just shy of an all-time peak of 7 million tonnes and more than 4 million tonnes at the end of 2013.
Soymeal stockpiles with crushers also hit a two-year high of nearly 2 million tonnes in early-May, nearly double the same period last year.
Losses in processing beans have already narrowed to about $30 a tonne from $80-$100 a tonne in April.
"China's imports in May and June could be close to 7 million tonnes per month, but meal prices have not collapsed even with expectations of such large imports," said one trade source in Beijing, who declined to be named due to company policy.
"There has been a short-term slowdown, but in the long-term large breeding farms need more meal which will lead to higher demand."
China is forecast to import 72 million tonnes of soybeans in the year to September, 2015 up from an estimated 68.5 million tonnes this year, according to U.S. Department of Agriculture estimates, as the country's growing middle class shifts to a high-protein meat diet.
Soymeal prices in Dalian's cash market <SM-EXFDLN-HQ> this week rose to their highest since early February, recovering from a near two-year low hit in March.
Government stockpiling has helped push up pork prices, which the National Bureau of Statistics said climbed 7.3-7.7 percent last week to 23.69-23.52 yuan a kg, adding to gains of more than 3 percent in the first week of May.
Meanwhile, commerce ministry data showed Chinese egg prices last week rose to their highest since October.
In a bid to beat the sluggish soymeal demand at home, Chinese crushers have been boosting exports to remain afloat. The country's soymeal exports rose 45 percent in the first four months of the year to 652,834 tonnes.
Exports in the marketing year to September are likely to reach 2.7 million tonnes, up from about 1 million tonnes in the previous year, said consultancy JCI.
"We expect crushing margins could turn positive, maybe in the late third quarter of the year," said one JCI analyst.
China's largest soy buyer Shandong Sunrise Group said it would not default on soybean contracts despite facing big losses, in order to protect its relationship with suppliers, state media has reported. ($1 = 6.2 yuan)