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PRUDENTIAL SECURITIES, INC.
One New York Plaza,
New York, New York
(June 9, 1997) SOYBEANS: Old-crop soybeans and the July/November spread broke sharply last week on concerns that imports from Brazil (totaling up to 14 million bushels between two crushers) would alleviate the extremely tight old-crop supply situation. One major U.S. crusher issued a press release that the company had contracted South American soybeans to assure its ability to meet domestic meal sales commitments. The rumored import bookings are in addition to 5 million bushels normally imported from Canada and compare with the USDA's import figure of 10 million bushels in its May supply/demand balance sheet. If the USDA raises that estimate to 20 million bushels in the Supply/Demand report scheduled for June 12, it is possible the department might increase old-crop U.S. carryover to 135 million bushels. However, it is much more likely that the USDA would leave unchanged the carryover figure of 125 million and boost its crush estimate 10 million bushels to 1,435 million.
U.S. soybean usage last week remained above the weekly average of 31.0 million bushels that was needed to meet the USDA's usage projections. Exports were 7.8 million bushels, which was on the needed average, but crush was above it at 25.5 million bushels.
From this week forward, combined crush and exports need to average 30.8 million bushels per week to reach the USDA's targets.
We are tentatively projecting June 1 stocks in all positions at 515 million bushels, down from 623 million a year earlier. The key uncertainty revolves around the residual figure. The cumulative residual on March 1 was 126 million bushels, and normally this figure declines in the March-May quarter as soybeans are "found." Our cumulative residual estimate for June 1 is 75 million bushels, a new record.
Brazil continues to use soybeans at a rapid rate because of aggressive exports. We raised our projection of Brazilian exports to 7.5 million bushels this week in response to the high pace of export registrations, which as of mid-May totaled 7.2 million metric tons (MMT). However, the large exports of Brazilian soybeans are robbing supplies from crushers. Thus, Brazilian crush appears likely to decline as a result of restricted supplies, even if Brazil imports a record quantity of soybeans. As a result, exportable supplies of soybean oil and meal are likely to decline, reducing competition for U.S. soy product exports during the first half of the new-crop year. The Brazilian crusher organization ABIOVE reported February-April crush at 4.479 MMT, down 263,000 tonnes from February-April 1996. We are forecasting crop-year crush at 19.025 MMT versus 20.154 MMT last season. Hence, the decline in crush during the first quarter of the crop year was slightly less than one-fourth our projected decline for the season as a whole. We have increased our estimate of Brazilian soybean imports to 2.2 MMT, of which we expect 1.12 MMT to come from the United States.
Hence, the more soybeans that Brazil ships to the United States during our old-crop year, the larger their import requirements will be in the new U.S. crop year. We are currently estimating that Argentina will import 250,000 tonnes of soybeans (100,000 tonnes from the United States), but that could be a conservatively low estimate. Argentina is likely to reduce soybean exports sharply this year in order to crush an increased quantity of soybeans in the face of reduced supplies.
Table 1 shows the effect of the large early-season Brazilian offtake on potential September 1 soybean supplies in Brazil, Argentina and the United States. Actual supplies on September 1 appear likely to decline to 14.89 MMT this year versus 19.61 MMT last year, which in turn was down from 22.42 MMT the prior year.
Adding in the U.S. 1997 crop (estimated at 2.600 billion bushels) and
making the indicated adjustments, supplies in the three countries combined
appear likely to exceed the year-earlier level by 51 million bushels based
on the assumptions shown.
Table 1
Potential September 1 Soybean Supplies
(1,000 tonnes)
1995 1996 1997
Argentina
Beginning stocks April 1 322 365 276
Summer imports 0 0 150
Production 12500 12430 11500
Total supply 12822 12796 11926
April-August exports 2501 2123 700
April-August crush 3969 4762 5100
September supplies 3648 5910 6126
Brazil
Beginning stocks Feb. 1 651 710 676
Production 25900 23700 26000
Total supplies without imports 26551 24410 26373
February-August exports 3189 3222 7500
February-August crush 13704 13468 13243
September 1 supplies 9658 7720 5630
September 1 U.S. stocks 9117 4980 3130
Combined September 1 supplies 22423 18610 14886
Additions/Substractions
Add U.S. soybean crop 59249 64828 70761
Substract Argentine seed/res. 651 770 373
Substract Brazilian seed/res. 1650 1550 1700
Substract US export > Argentina 0 0 100
Substract US export > Brazil 0 221 1120
Effective September 1 supplies 79371 80957 82354
Source--Oil World; USDA; PSI estimate
In the United States, new-crop planting is 77% complete and emergence has made some progress. However, the weather remained too cool and wet in the eastern Corn Belt and the Delta last week.
Hence, much of the benefit for yield from early planting has been lost. We are projecting June planted acreage at 69.5 million, up 1% from the Intentions report, and a crop of 2,600 million bushels.
New-crop usage prospects are improving and our statistics indicate that 1997/98 could be another demand bull year for soybeans, although early season usage does not appear as high relative to supplies as in 1996/97. We have increased our new-crop export estimate to 930 million bushels, to cover increased shipments to Brazil and Argentina, and currently project new-crop carryover at 195 million bushels. In its Supply-Demand report on June 12, we expect the USDA to increase its estimate of Brazilian imports, raise its new-crop U.S. export projection and lower its new-crop carryover projection to 230-250 million bushels from 260 million.
The recent price decline has not rationed worldwide usage. Indeed, the availability of Brazilian soybeans has led to complacency all year long about the need to ration U.S. usage. Now it will be interesting to see if prices continue to reflect complacency about shrinking availability of South American beans, whether for export or crush, because of prospects for a large U.S. crop. Some of the weakness in the November contract last week probably stemmed from ideas that there would be no bean shortage because of the brisk trade between Brazil and the United States on a semi-annual basis, with each country relying on the other to fill in supply gaps.
Hence the market may think there is no problem with supplies. The removal of export taxes--and, more importantly, the differential export tax--in Brazil helped set this process in motion. However, it remains unclear whether Brazilian crushers will be successful in influencing their government to reinstate the, export tax. Some Brazilian crushers are not in a position to benefit from imports, which favor crush facilities near ports.
Several U.S. soybean processors switched their basis quotes to the August and November contracts last week on fears of extreme volatility in the July. Given the tight U.S. supply situation and concerns over the ability of imports to alleviate that tightness, soybean prices are likely to remain volatile. The lack of deliverable supplies, a tight domestic cash market and evidence of insufficient usage rationing should serve as supportive factors. If new highs are made in late June, we would expect July futures to peak between $9.35 per bushel and $9.85. Our previous estimate of $10 to $11 looks unattainable at the moment. July soybeans penetrated their price low of $825 but did not break the $8.19 mark, which is the comparable low on the nearest futures charts; hence, a technical case could be made that prices held support. However, if the high was $9.02, then look for July to decline to the $7.70 level.
The crop-scare rally season for November soybeans usually begins in
the June 25-July 15 time frame, but obviously depends on the weather. It
is hard to generate a crop scare with the cool, wet weather that has prevailed
so far this season. A turn to hot, dry weather (or at least a forecast
of such) probably is necessary to set a crop-scare rally in motion. We
are looking for a summer high in November beans of at least $7.50. This
high could possibly be much higher, depending upon the weather and, to
some extent old- crop price action. Near term, support is at $6.50. Our
harvest low projection for November soybeans remains $6.50-$7.00.
SOYBEAN MEAL--July soybean meal has not been able to penetrate its May 12 high, when a key reversal indicated a possible top. Last week's price action, while technically negative, was due to bearish fundamental news. Although there was talk about possible importation of South American soybean meal (pellets, actually), it appears much more likely that beans would be imported instead.
Meal's price decline reflected the idea that U.S. supplies of both soybeans and soybean meal would be augmented if soybeans were imported. In addition, a surprisingly quick increase in weekly crush following processors' maintenance downtime may have overproduced soybean meal. However, as long as soybean supplies remain tight, old-crop soybean meal will have a constructive tone.
A paucity of new export bookings is threatening the USDA's old-crop
export projection figure of 6.75 MMT, not to mention our forecast of 7.08
MMT. Weekly sales need to increase an average of 63,000 tonnes to meet
the USDA's projection, assuming that carryover sales are the same as last
year's and that hull meal exports (not reported in the weekly figures)
account for 6% of the total. Export sales rose 30,000 tonnes in the week
ended May 29.
Due to lack of competition from South America, new-crop soybean meal
exports are likely to approach the record level of 7.9 million tons seen
in 1979/80. We are projecting combined exports of soybean meal from Argentina
and Brazil to decline 800,000 tonnes in the October-March period. Only
about half of that drop is likely to be made up by the United States, with
the remainder coming from competing oilseed meals. The current El Nino
bears watching for its impact on fish meal production as well.
Weekly reports from the National Oilseed Processors Association (NOPA)
indicate that apparent crush for domestic meal usage remains above the
prior year's level. May soybean crush appears to have been about 110 million
bushels. Assuming that exports reached 425,000 tons, domestic usage appears
to have been near 2.167 million tons, about unchanged from the prior year's
level for the second consecutive month. The weekly hatchery report showed
eggs set at 105% of the year-earlier level and chicks placed at 104%. A
large domestic poultry producer was reportedly approached by a crusher
about accepting South American origin meal before, the crusher decided
to import soybeans. This action suggests that there may be large sales
on the books to domestic users and that crushers may be importing beans
to meet those commitments. If tight meal supplies can be alleviated with
imports, then a sharp reduction in feeding profitability might be avoided.
Hence, both hog and poultry numbers should continue to expand. The poultry
feeding profitability has declined in recent months and needs to be monitored
carefully.
The continued tight soybean supply situation (assuming imports not much larger than now talked about) is a constructive factor for soybean meal, but the sharp price decline last week makes our forecast high of $335 per ton to $340 in July soybean meal look unattainable. If the high has been made, then July has downside risk to $245. July penetrated its prior low of $276.70 last week, and should find better support at $265. December meal has declined in sympathy with the old-crop contracts, but not to the same extent. Because we still expect very large exports early in the 1997/98 crop year due to reduced Brazilian supplies, we remain bullish on December meal. That contract has support near $216. We are still looking for December to reach a summer high in the $240 to $280 range and a harvest low between $225 and $240.
SOYBEAN OIL--Soybean oil and other major world vegetable oils have been influenced this season by conflicting factors. The decline in production of high-oil-yielding seeds in combination with a resurgence of Chinese buying threatened to result in an extremely tight oil supply situation. However, strong meal consumption (led by increased Chinese purchases) helped boost soybean crush and, hence, soybean oil production; in the United States, this factor helped offset the effect of sub-par oil yields.
Consumption of U.S. soybean oil this crop year has been very high.
Domestic soybean oil usage is expected to set a new record this season due to reduced supplies of competing domestic fats and oils.
In addition, exports are expected to nearly double last year's level. This should result in a slight decline in ending soybean oil stocks. (We are basing our estimates on a product-year soybean crush of 1,438 million bushels. But, if soybean imports allow a higher crush, then stocks might exceed our estimate.) The strong soybean oil usage to date has resulted in a rather dramatic strengthening in the cash soybean oil basis.
World oil prices also have firmed in recent months on a tightening old-crop stocks situation in the northern hemisphere and on continued reductions in South American crop estimates. Palm oil, the major component in world oil trade, continues at a premium to soybean oil and other major oils. However, that premium has narrowed in the last four months as palm oil prices have declined while other oils have advanced.
The USDA is likely to increase its old-crop soybean oil production estimate in its June 12 Supply/Demand report, likely splitting the added production between exports and stocks. It is less likely that the USDA will increase its new-crop crush estimate. However, it may boost its new-crop soybean oil export figure in response to the El Nino and because of lower exportable supplies of soybean oil and sunflowerseed oil out of South America during the first half of the new U.S. crop year. The combination might result in a reduction in the USDA's new-crop ending stocks estimate from the May figure of 1,950 million pounds.
Like the last season, the new-crop outlook for soybean oil will be governed by conflicting factors, the two most important of which are: (1) U.S. soybean meal consumption, which is likely to continue controlling crush; and (2) soybean oil exports, which are the swing factor in usage. Waning supplies of South American soybeans and soy products in the first half of the 1997/98 U.S. crop year should push U.S. soybean crush to another consecutive record. If oil yields recover to a more normal level of 11.2 pounds per bushel, record U.S. soybean oil production would result. However, prospective usage also looks large. The El Nino should enhance the long-term prospect of soybean oil exports by reducing supplies of palm oil, palm kernel oil and coconut oil through a drought in Southeast Asia. Indications from the Southern Oscillation Index point to a poor Indian monsoon, and a monsoon failure could boost new-crop U.S. soybean oil exports. The Indian meteorological department has projected that the monsoon, which is expected to be on the low end of normal, would be a week late, but the political component of this forecast merits caution. However, if the Indian monsoon is normal and if the El Nino fades quickly, the prospective increase in world oilseed production in 1997 and strong demand outlook for U.S. soybean meal threaten to increase U.S. soybean oil stocks.
Although the immediate situation for oil does not look fundamentally constructive, the very long-term outlook does. The key price level to watch (basis nearest futures) is 22.16 cents, the prior low reached in October 1996. If this level is penetrated, the nearby contract has downside risk to 18.00 cents in the fall, assuming that it bottoms with soybeans and meal, which is often not the case. A low in November soybeans at $6.50 per bushel (the low end of our projected range) and a low in December meal at $240 per ton (the high end of our projected range) with a 75-cent crush margin, would result in a December soybean oil price of 17.90 cents and an oil share of 27.2%. This is the risk scenario, not our forecast. The oil share of the joint product value has recovered as soybean meal prices have slipped from their recent highs. However, the outlook for large soybean meal consumption in the first half of the new-crop year is likely to keep the soybean oil share of the joint product value under pressure. In the second half of the new crop year, however, both prices and soybean oil's share of the joint product value would rise given the outlook for a fresh infusion of South American soybeans and meal into the world market and the potential decline in palm and coconut oil production as a result of the El Nino. In the near term, tight U.S. soybean supplies and uncertainty about the progression of this year's Indian monsoon should keep oil prices well-supported above recent lows.
Anne Frick
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