These articles are brought to you by:
| ALLENDALE, INC. COMMODITY REVIEW AND OUTLOOK PRUDENTIAL SECURITIES, INC. |
ING DERIVATIVES CLEARING GLOBAL ASSET MANAGEMENT COMMODITY RESOURCE CORPORATION MARGRAF ON THE MARKETS |
4506 Prime Parkway, McHenry, Illinois
(June 27, 1997) SOYBEANS: ALDL stocks estimate at 501 is bullish compared to trade estimates. We calculated it by taking 126 mil. bu. stocks, working backwards to figure the inventory we need going into 4th quarter. Then we took 2nd quarter stocks, subtracted weekly crush and exports and worked forward to get a 488 number. If USDA says 488, then ending stocks are only estimated at 80 mil. bu. Thus any number less than 510 is bullish as commercials will not have enough inventory to meet current usage. ALDL acreage at 67.8 is bullish versus trade. This would lower production to 2560 and stocks to 195 if we do not account for South American imports, 175 if we do. CRGL made a deal with Brazil to import beans to U.S. and to export U.S. to South America after our crop is harvested. Now that South America has lowered their production 2 mmt, they will need the beans imported earlier and this could cause the shortage in the U.S. to get real interesting. If the reports are in line with our thinking, the S/D report on the 11th will also be bullish because they will factor acreage, lower production and raise the exports to South America which will lower stocks. Also world stocks will be a strong record low. Deliveries will also be an issue for the market as the Cont'l, Crgl, Adm scenario plays out. Currently, the story was Cont' was bringing in 20 barges (or about 1.0 mil bu). But today we saw 98k bu moved out of position and commercials have told us that all barges have been committed to processors. With only 2.8 mil. bu. in position and 120 mil. bu. in open interest, the shorts best have beans to deliver as commercials see the CBOT as a viable place to get bushels. We rolled longs to August and bought puts for protection. We remain very bullish beans. Currently this is a neutral position if it moves down and outright long if it moves up. The reason this position works now versus not working before is because option premium has declined in value due to the recent sell off.
Bill Biedermann TOP
195 Route 6A, Suite 6, Orleans, Massachusetts
(July 2, 1997) SOYBEANS: The USDA showed bean stocks tighter than expected, but the increased acreage and good growing weather carried the day. Part of the mind set is that with a good and sizable crop, end users will wait till the new crop is in before purchasing. Weather will remain an issue, as the crop has little premium built into the prices, and most of the growing season is ahead of us. Fund selling has been a major factor in the downmove. On the positive side, new-crop commitments are strong, and we may see beans eventually begin to rise in price.
RECOMMENDATION-Are new-crop (November) beans worth less than 600? It may be that traders should aggressively buy November futures and calls looking for a weather problem or an increase in business. Use stops of about 10 cents on futures. Conservative traders should buy calls on breaks or stay on the sidelines. When July approaches last trading day, the action could become intense. There have been no delivery registrations for July beans or meal. Aggressive players might watch August beans to see if they gain any buying interest, and consider buying them.
M. Steven Morgan TOP
One New York Plaza, New York, New York
(June 30, 1997) SOYBEANS: Old-crop soybean prices declined last week on fund liquidation ahead of first notice day on June 30 and on expectations that soybeans would be moved into Chicago for delivery against the July contract. Domestic cash basis levels appear strong enough to keep deliveries extremely light or nil, but the unusually wide inverse commanded by the July contract makes it vulnerable to a sell-off on any hint of easing in supplies, whether deliverable beans or soybean imports. The new- crop contracts were under pressure from nearly ideal U.S. weather conditions; needed rain was received in the western Corn Belt and needed warmth was received in the eastern Corn Belt and Delta. The initial crop ratings of the season showed soybeans in mostly good condition.
Price action for the week and possibly longer will be determined largely by the USDA's Stocks In All Positions and Planted Acreage reports released before the market opens on Monday, June 30. The expectation was for a stocks figure near our estimate of 515 million bushels, down 17% from the year-earlier level. A bullish surprise could ignite another rally in old-crop beans. However, the market would then weigh the likelihood of adequate imports in a narrowing time frame (soon enough to augment old-crop supplies but before new-crop harvest) against the necessity for sharply higher prices to immediately ration usage. A bearish report, combined with continued favorable U.S. weather, probably would lead to further erosion in old-crop prices. However, the tight deliverable supply situation could still become a price- making factor, and bears close monitoring,
The large increase in acreage this year appears likely to result in record U.S. soybean production, In response to the excellent growing conditions, we have raised our forecast of soybean yield to 39.0 bushels per acre, the second highest on record. U.S, soybean yields are usually high in years when an El Nino began in the spring (as was the case this year). We do not expect a record national average yield this year because of the large acreage, which will include less productive land. Roundup-Ready soybeans are expected to achieve higher yields, but probably accounted for less than 15% of the plantings, not enough to significantly impact the national average yield this year.
The USDA will not issue its initial survey-based U.S. crop estimate until August. Final yields in August tend to be lower than the final in high-yielding years (i.e., "big crops get bigger"). In 1994, when the record final yield of 41.4 bushels per acre was reached, the August yield was 37.6 bushels. In the six years out of the last 10 when final yields exceeded the August yield, the August yield averaged about 95% of the final. Hence, if the final yield were to reach 39.0 bushels per acre this year, the August figure might be only 37.0 bushels, which would be a bullish surprise relative to current expectations. More importantly, the USDA will use its August crop estimate in the accompanying Supply/Disappearance report. With the USDA's June estimate of new- crop usage at 2,495 million bushels, a yield of only 37 bushels per acre would result in a lower new-crop carryover than shown in June unless harvested acreage were to reach 70 million. This factor could keep the USDA conservatively low on its new-crop usage projections, a stance that is evident with the June figures.
New- crop crush is likely to reach record levels to meet large soybean meal export demand that likely will result from reduced South American meal supplies the first half of the U.S. crop year. Domestic consumption of meal also looks likely to increase given the USDA's projection for expanded animal numbers. Our crush estimate is 1,480 million bushels on a soybean crop year and 1,485 million on a product crop year (tight old-crop supplies will constrain crush in September, a new-crop month for soybeans but an old-crop month for products).
New-crop soybean exports also look likely to be very large. One situation that bears watching is the very hot, dry growing weather currently prevailing in China's main soybean-producing areas. If a drought results in a third consecutive poor soybean crop, China probably would need record- large soybean imports to support newly expanded crushing capacity. There already are 116 million bushels of new-crop soybean export sales on the books, an unusually large amount this far in advance of harvest. Our new-crop export projection is 947 million bushels.
We estimate new-crop usage at 2,552 million bushels. With beginning stocks of 115 million, imports of 5 million and our tentative crop estimate of 2,670 million bushels, total supply for 1997/98 would be a record 2,790 million. The resulting carryover would be 238 million bushels, or 9.3% of usage. This is not unusually tight. However, usage is likely to be heavily front- loaded this year given the tight South American supply situation expected to prevail by September 1. As a result, we are projecting October-December usage at 29.9% of October 1 calculated supplies, the third-highest level in history, behind 1996 and 1953. Hence, the 1997/98 crop year appears likely to be another demand-bull season.
The crush level needed to accommodate projected meal consumption is likely to require a record crush of 414 million bushels during the October-December period; this will require good crush margins. Based on the pattern for December product/November soybean crush margins in prior years with large soybean supplies and strong product demand, crush margins appear likely to reach a low in the June/July period and widen into early November. This year, the low in the December/November crush spread in June was 63 cents per bushel. The near-term downward risk in this spread appears to be to 40 cents, based on the historical relationship between the summer low and the spring high. However, it is possible that the summer low is already in place at 63 cents; the spring low was 52 cents. We expect the spring high of 81 cents to be penetrated by early November. The January crush margin could exceed the $1.00 level prior to expiration.
Barring a major bearish surprise in the June Stocks report, we retain a bullish bias toward the outlook for old-crop soybean prices and for old-crop/new-crop spreads. New highs are still possible in July soybeans (daily price limits are removed in the delivery period). If prices continue eroding, history suggests that a decline to $7,70 would be likely. November soybeans penetrated their fall low of $6.47 last week, November soybeans have declined more than $1 from their winter high and we do not expect further price erosion. There is no key technical support level below $6.47. Based on our projected risk low of 18.00 cents per pound in nearby soybean oil (18.50 cents in the December contract) and the $199-per-ton contract low in December meal, the current December/November crush margin would present a case for a risk low of $5.72 in November soybeans. We do not expect prices to see this level because we do not expect the risk lows in both products to occur simultaneously. We believe a harvest low (August 1 through expiration) in November soybeans in the $6.50-$7.00 range is most likely. There is no reason, given current weather, to expect a crop-scare rally to develop, but it would be a very unusual year if one did not occur. On a crop-scare rally, we would look for November soybeans to penetrate the winter high of $7.50.
SOYBEAN MEAL-Soybean meal prices continued their downward slide last week due to extremely weak South American basis levels, liquidation of July open interest and near-ideal growing conditions for U.S, soybeans. Price action in the week ahead will continue to hinge on the U.S. weather outlook as well as on the soybean stocks and acreage reports.
Despite a drought- reduced soybean crop, Argentina is likely to increase soybean crush; the wide price inverse appears to be encouraging a fast crush pace in order to capture the old-crop premium. Although recent sales of South American meal to China have been very high, European interest has flagged, leading to declines in meal basis levels at origin due to apparent overproduction. There also were concerns last week that China was re-selling or canceling a portion of their prior purchases. Brazilian soybean crush is running ahead of last year's pace, despite the prospect that large soybean exports will force a reduction of nearly 8% in Brazil's 1997/98 crush. Brazilian soybean meal exports through June 16 were reported by Safras e Mercado at 3.9 MMT versus 4.4 MMT during the same period a year earlier, so increased meal production in Brazil is also depressing basis levels. The rush to consume and sell old-crop soybeans and products in South America is likely to exacerbate the prospective deficiency in South American supplies in the first half of the new U.S. crop year.
Weekly soybean crush continues to run at a pace in excess of the average needed to reach the USDA's crush estimate, and domestic meal basis appears to be softening. Apparent domestic consumption still exceeds last year's level. (Domestic usage is a derived figure once exports are subtracted from total usage.) The surprisingly large export figure in April made that month's domestic usage figure look low at 2,100 million tons versus 2,214 million in April 1996. Total meal usage in May was 2.641 million tons. Assuming exports were 340,000 tons, as indicated by the weekly shipment figures, then domestic usage for the month was 2.301 million tons. If so, cumulative domestic offtake of meal in the first eight months of the crop year was up 1.8% versus the comparable year-ago period. The weekly hatchery report showed eggs set up 5% and chicks placed up 4%, continuing to indicate expansion in broiler numbers. The quarterly Hogs and Pigs report showed the U,S. hog inventory at 102% of last year's June 1 figure. An expansion in the hog inventory is still forecast for the 1997/98 season and indicated by farrowing intentions of 105% for June- August and 106% for September-November.
Old-crop exports (including hull meal) through April have been reported at 5.18 million tons, To meet our crop-year export projection of 6.88 million tons, exports in the May-September period need to reach 1.70 million tons, Assuming that hull meal continues to account for 6% of total exports, and considering reported shipments since May 1 as well as unshipped sales on the books, net new bookings would need to average 43,000 tonnes per week. If allowance is made for unshipped sales at the end of the year, using last year's level as a proxy, then the needed weekly sales from here forward would be 58,000 tonnes. (These figures are lower than recent calculations because the reported Census Bureau exports have exceeded the comparable figures reported in the Export Sales report.)
The key fundamental factor in the new-crop meal outlook remains the prospect of record exports in the first half of the crop year and near-record exports for the season. New-crop export bookings are already very large for the time period at 521,000 tonnes. Our crop- year export estimate is 7.790 million tons versus the USDA's current projection of 6.700 million tons. We are projecting an increase in domestic usage of 1.5%, which may be conservatively low. Our projected new-crop meal usage figure would require record soybean crush. Because soybean meal demand should be the driving factor in determining crush, soybean meal prices will need to be high enough to make crush margins profitable.
July soybean meal has downside potential to the $245 level if the highs are in place at $297.80, as seems likely given the decline over the last seven weeks. However, resolution of the remaining open interest in the July contract remains a potentially bullish factor. Also, soybean meal prices will be influenced by any surprises in the stocks and acreage reports for soybeans. December soybean meal has support at the contract low of $199. Resistance is directly over the market at $216. On a summer crop-scare rally, December meal could still penetrate its spring high of $231.50. The good usage outlook should be a supportive factor to new-crop prices, but as long as the growing weather for U.S. soybeans remains favorable, the meal market will have trouble reacting to news from the demand side of the balance sheet.
SOYBEAN OIL-Soybean oil prices eroded further last week with the old-crop contracts reaching new contract lows, The price decline appeared to be mainly in sympathy with weakness in soybeans and meal rather than from any fundamental factor for soybean oil. The Census Bureau reported end-May soybean oil stocks at 2,143 million pounds, down slightly from the end- April level of 2,164 million, but well above the prior year's figure of 1,759 million. The continued high crush pace is maintaining soybean oil stocks above 2,100 million pounds despite good domestic offtake, which was up 4,4% year-over-year for the first seven months of the crop year.
U.S. soybean oil export prices are becoming more competitive with South American oil. As a result, some fresh export sales appear to have been made last week, with the totals thought to be in the 40,000- to 70,000-tonne range. Crop-year exports through April were 1,454 million pounds, according to the Census Bureau. The Export Sales report shows shipments May 1 through June 19 at 60 million pounds and unshipped sales at 148 million pounds. Assuming that donations (which are not included in export sales) account for 20 million pounds per month, average weekly sales would need to be 9,400 tonnes to reach our 1996/97 export projection of 1,900 million pounds.
The new-crop soybean oil outlook will be dominated in the first half of the year by prospects for strong meal consumption and record crush. We are projecting that soybean oil yields will increase to a more normal level of 11.15 pounds per bushel, which should result in record soybean oil production and total supplies. Usage looks likely to reach a record level as well. We are currently projecting that new- crop U.S. soybean oil exports will increase, but our estimate of 2,200 million pounds is more likely to be low than high. World production of rapeseed/canola and sunflowerseed is likely to increase in 1997, providing more competition for soybean oil from other seed oils. However, South American soybean oil export supplies are likely to decline this year due to reduced soybean crush in Brazil. We estimate Brazilian oil export availabilities will drop 350,000 tonnes; to 1.0 million metric tons (MMT). Meanwhile, a smaller soybean crop in Argentina may result in reduced soybean exports but increased crush. We expect Argentine soybean oil exports to increase about 100,000 tonnes to 1.725 MMT. Our new-crop U.S. export projection implies an increase of 300 million pounds (136,000 tonnes), offsetting only a portion of the decline in South American exports. Increased supplies of palm oil (the first half of the crop year), rapeseed/canola oil, and sunflowerseed oil should help offset the decline in South American supplies that will occur during the first half of the U.S. crop year.
We are forecasting that new-crop domestic disappearance will stage a trendline increase of 330 million pounds. Despite the outlook for higher usage, production would still exceed consumption in the 1997/98 season if yields return to a more normal 11.15 pounds per bushel. Our ending stocks estimate is 2.00 billion pounds, up from our projection of the current season's level of 1.83 billion.
OIL SHARE OF JOINT PRODUCT VALUE-The oil share of the joint product value has recovered from its low of 28.9% (basis July contract closing prices) on May 20. Similarly, December oil share has gained from its low settlement of 34.5% that same day. We had been looking for the low oil share of joint product value to occur in June, in conjunction with a peak in soybean meal prices. However, meal prices declined during June, We now believe it appears most likely that the oil share will encounter a period of weakness this fall and that a major change in the oil share will not occur until next spring.
The major long-term bullish factor in the soybean oil market is the El Nino, but that will not have a direct impact on world vegetable oil supplies until 1999 because of the long lag times between drought and tree-crop tropical oil production (about 11 months for palm oil and 15 months for coconut oil). A failure of the Indian monsoon is still a possibility, but while that could increase Indian soybean oil imports, a poor monsoon would also reduce Indian soybean meal export supplies. In addition, Peruvian and Chilean fish meal production is likely to decline in calendar 1997 as a result of the El Nino. Hence, the immediate effects of the ENSO episode appear likely to affect both meal and oil while the long-term effects will be felt most directly in oil. However, the El Nino has been widely advertised and its impact on drought in Southeast Asia is well documented and probably well known. Because oil is a storable commodity, there may be some hoarding and inventory building prior to the regime of reduced production and stocks associated with the El Nino, shifting some of the effect on soybean oil consumption into an earlier time frame (the first half of the crop year).
A major crop-scare rally in soybeans this summer probably would pull oil along for the ride, especially in view of the El Nino. But, once the crush for meal begins in the fall, oil supplies could become burdensome, and a nearby oil share in the 28%-29% range is very possible. The major change in oil's share of product value should come next spring, once the South American soybean crops are harvested. Because of the relatively high meal content of soybeans, those crops will contribute a potentially large infusion of world meal supplies at the same time that palm oil and coconut oil production are beginning to wane (in the summer and fall of 1998). This should be a price-supportive factor for soybean oil and for the oil share of the joint product value.
From a technical perspective, there is a long-term downtrend line on the monthly charts from the all-time highs reached in 1974. This line crosses at about 27.45 cents in July and declines about 0.10 cents per month. It will be a much less onerous task to penetrate this line nine months from now (at about 26.65 cents next March) than at current prices.
In sum, soybean oil is likely to be a bull market in its own right beginning in the spring of 1998. In the meantime, it probably will continue to be a true by-product of meal demand. Downside potential in the oil share is probably to 28%, which is not much below current levels, while upside potential is probably to 32-33%, basis the nearby contract. However, any rallies through 30% are likely to be short-lived as the oil share probably will spend most of the next nine months under 30%, basis the nearby contract.
The key price level to watch is 22.16 cents, which was the low made by the nearest futures contract last fall and was equaled last week in the July contract. If that level is penetrated, nearby soybean oil prices would have downside risk to 18.00 cents.
Anne Frick TOP
209 South LaSalle, Chicago, Illinois
(July 3, 1997) SOYBEANS: For the last month, we talked about how circumstances looked to change in the July beans and that we'd "fill in " the supposed demand hold by way of: rolling from old to new; by straight cancellations; by good crop prospects limiting old-crop premiums, etc., etc. Our objective in the july was $7.50 minimum. Well, things turn bleak quickly once the game was up and as of this writing we're closer to $7.00...and may go even lower. One could be bullish before but beware when the talk turns to squeeze; that we'll "run out"; that so America will "run out." At some point all that runs out is one's equity. That said, the November well beyond our cautionary downside level of $6.50. Then again, we missed the acreage number and didn't believe we see the near 71 million acres that was reported. That and the funds selling was enough to get November under the $6.00 mark (never see a $5 in front of beans again, eh?). Most of that move came in two days of trading. Therefore, like in the December corn, the right thing to do may be to sell November here, but we're getting close to discounting a record crop as long as the demand projections hold up. Aside. Will take a longer look next time.
John W. Kleist
Sagamore Partners, Inc. TOP
575 W Madison, Ste 2607, Chicago, Illinois
(July 02, 1997) SOYBEANS: Activity in the soybean complex was very weak during the past few trading sessions spark mainly by the increase of planted acres by the USDA along with very slow export activity. The USDA indicated on their June Planted Acreage report that total planted acres would be near the 70.9 million acre level. This figure is 10% above that of a year ago and 13% over the 1995 figure which would make it the largest planted area since 1982 and the third largest figure on record. The USDA estimated harvested acres at 69.8 million acres which is 10% above year ago levels. Overall, market internais are weak and with the figures that the USDA estimated coupled with the fact that the weather has been ideal should keep price action under pressure. The only way this could turn around is if some unforeseen demand comes into play sparking some kind of a tight supply fear, but as of now it does not seem possible until the market settles down a bit. Technically, November soybeans are in a downtrend: the trend would turn up on a close above $6.56.
FUTURES STRATEGY--Short SX at $7.20. Move protective buy stop close only down to $6.25¼.
OPTIONS STRATEGY--Short SQ $8.75 call at $. 10. Maintain a protective buy stop at $.23.
Tony Montini TOP
COMMODITY RESOURCE CORPORATION
P.O. Box 8700, Incline Village, Nevada
(July 3, 1997) SOYBEANS: OUTLOOK-The big rally I saw coming this month never materialized. In fact, it turned into a big rout. I was focused on the tight supplies (confirmed on the June 1 Stocks report). The market, however, was overwhelmed by the shocking acreage seedings data. The USDA indicated 4 million additional acres were found this year over and above the most optimistic estimates. This combined with good growing weather, thus far, has collapsed the new crop and brought the old crop along with it. Many farmers with old crop remaining panicked; additionally margin call selling has fed on itself. The USDA numbers may not be correct, but the market believes them at this time, and as the old saying goes, `the market is always right.' I was looking for a market like corn of last year. Instead we got a demoralized, oversold, and yes, undervalued situation. You can't fight it!
STRATEGY: HEDGERS-Actually, this recent collapse underscored the advantages of holding options versus futures or cash beans. After accepting net profits of $1.10 in March and May bean calls (purchased as a replacement for cash bean sales) we gave back 25-45 cents in the July 850s and will probably lose our 10 to 25 in the August 800 calls. Giving back 30 to 50 cents of profits is better than watching the value of your inventory fall by two dollars. We also remain 50% sold in new-crop November futures at an average price of about $7.02.
TRADERS: Previously placed stops kept us out of the recent rout. This market is undervalued, my opinion, but we need to see signs the current liquidation is over before I would touch this one again.
George Kleinman TOP
27253 Timberlane, Monee, Illinois
(July 2, 1997) SOYBEANS: HIGHLIGHTS-Soybean prices have fallen precipitously in the past 4 trading sessions: July down 89½, August down 73, September down 68¾ and November (new crop) down 62.
TECHNICAL ANALYSES-TRENDS (August '97 and November '97): Long-term down, intermediate down, short-term down.
FUTURES: (August '97) Close 670¼ [4-day change = 73], resistance ?, support 663. (November '97) Close 585½ [4-day change = _62], resistance ?, support 585.
FUNDAMENTALS-BULLISH: None known.
FUNDAMENTALS-BEARISH: Weather continues to be the dominant bearish influence as near ideal conditions prevail in the U.S., following an excellent South American crop. Export demand is slow.
RECOMMENDATIONS-POSITION RECAP: Short multiple old- and new-crop positions in the extended downtrends.
NEW: Sell/add on pullbacks oco support violations. On remaining position, exit at first signal (trailing stop, parabolic or Margraf Exit Rule #2).
Ernest Margraf TOP
Added to the WWW 07-04-97
Last updated on 07-04-97
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com
