A.G. EDWARDS & SONS, INC.
One North Jefferson, St. Louis, Missouri
314-955-3050
(March 21, 2002) SOYBEANS: The apparent resolution of the Chinese GMO controversy has lifted a major negative that has hung over the soybean market for many months. China began imposing restrictions on GMO imports on March 20. However, the U.S. has brokered a deal with China to effectively allow GMO soybeans from the U.S. to enter China after a 30-day application period. We wouldn't ignore the possibility that China might try to pull some shenanigans again if it is to their political or economic betterment, but let's assume for the time being that China has made its point to the rest of the world and it is ready to resume normal trading in the soybean market.
If that is the case, we may begin to look more positively on the soybean market and upside price potential. Here are some of the bullish fundamental arguments:
1. USDA will release its quarterly grain stocks estimates on March 28. Our calculations indicate that USDA should report quarterly soybean stocks about 65 million bushels less than it did in March, 2001. Total usage likely exceeded last year by 100 million bushels during the winter quarter.
2. Soybean exports for the crop year are likely to exceed the current USDA forecast of 1.020 billion bushels. Little noticed this year is that sales to all other countries other than China are literally exploding. China gets the majority of the attention as it should being the number one soybean importer in the world. Sales to all other countries are at 725 million bushels as of February 28, 88 million more than last year and a record for that date. If the U.S. only sells another 15 million bushels to China this crop year, which is what it did last year from March 1 to September 1, and it sells an average amount of beans to other countries for that time period, total export sales will be 40 million more than USDA is now forecasting. Coincidentally, that is the lead that soybean sales commitments have over last year as displayed in the chart following.
3. If these two points are correct, then USDA will have to cut its forecast of soybean ending stocks over coming months. USDA estimated 2001-02 ending stocks at 265 million bushels on March 8. As just discussed, we forecast USDA will be increasing its export projections in the months ahead. There may also be some additional upward adjustments in crush demand estimates. We are thinking right now 220 million bushels of soybean ending stocks, maybe less, versus 248 million last year.
Total Soybean Sales Commitments
This Year Versus Last Year
(Million Bushels)
Chart courtesy of A.G. Edwards.
What are the risks to the bullish case for soybeans? First, the USDA quarterly stocks report helps to determine how accurately it forecast the size of the 2001 crop. USDA may find more soybeans were harvested than it estimated in January, resulting in higher March 1 stocks. Second, the acreage report out that same day may indicate that farmers intend to plant more soybean acres than the trade expects. That has happened many times. And third, the dollar has acted a bit weaker recently. But if it strengthens, then that negates some of the potential bullishness for soybeans.
With regards to our trading plans, we currently hold a bull spread of old-crop July versus new-crop November. November is currently trading at a premium to July. Each of the past two years July has traded to a 20-cent premium to November. We look for the tightening supply/demand to propel July to a premium again this year. We have not advised soybean farmers to hedge given that prices are currently well below the protective loan rate.
We are long July soybeans/short November soybeans, at 2-1/4 cents, premium the November. We have a protective close only stop at 8-1/4 cents, premium the November. Our target is 18 cents, premium the July.
Bill Nelson www.agedwards.com