Soybeans Signal Slowing Inflation In China

Soybean prices have been falling precipitously in the last month.  See the chart to the right.Earlier this morning, Goldman Sach's grain analyst Damien Courvalin cut his 3-month, 6-month, and 12-month targets for soybean prices.  He expects $12.60/bushel, $13/bu, and $13/bu, respectively, down from his previous forecast of $13.75/bu, $14/bu, and $14/bu.Courvalin also noted, "Interestingly, the recent collapse in soybean prices will potentially have a beneficial impact on Chinese inflation as local food inflation and CBOT soybean prices have exhibited a strong correlation over the past few years."Bloomberg economist Michael McDonough also expects food inflation to slow.  He offers this chart which overlays Chinese food CPI with Bloomberg's Chinese daily food price index:Morgan Stanley's Stephen Roach welcomes the developments as good news for China:Inflation is always a serious risk in China – especially with headline increases in the country’s Consumer Price Index surging through the 6% threshold this summer. The government has responded forcefully on four fronts.First, food inflation, which accounts for about half the recent run-up in overall prices, has been addressed by administrative measures aimed at cutting fertilizer costs and removing bottlenecks to increased supplies of pork, cooking oil, and vegetables. Second, in an effort to curtail excess bank lending, reserve ratios were increased nine times in the past 11 months. Third, the rate of currency appreciation has edged up. Finally – and perhaps most importantly – the People’s Bank of China has raised its benchmark policy rate five times since October 2010. At 6.5%, the one-year lending rate is now 0.3% above August’s headline inflation rate.If food inflation recedes further, and the headline inflation rate starts to converge on the 3% core (non-food) rate, the result will be the equivalent of "passive monetary tightening" in real (inflation-adjusted) terms – precisely what the inflation-prone Chinese economy needs.Please follow Money Game on Twitter and Facebook.Join the conversation about this story »See Also:Here's Who Has To Pick Up The Pieces If China Lands HardGoldman's Jim O'Neill: 'What Is The Matter With Everyone?'WAIT: Some Actual Not Horrible Economic News In Europe

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