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PRUDENTIAL SECURITIES, INC.
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(November 3, 1997) SOYBEANS: BACKGROUND FACTORS INFLUENCING SOY COMPLEX PRICES–COMPETITION FOR ACREAGE: Since 1974, world oilseed acreage has expanded while grain acreage has stagnated. Yet, projected stocks-to-usage ratios are tight for both grains and oilseeds. Annual changes in area planted to oilseeds and grains have tended to move in opposite directions since 1986. Provisions of the 1996 Farm Bill allow U.S. planting decisions to be determined by market signals rather than by USDA policy. With the exception of 1994, when acreage was recovering from flood-prevented plantings the prior year, grain and oilseed plantings have tended to change in inverse fashion in the United States as well. Crop rotation considerations and the relatively tighter balance sheets for U.S. and world grains than for oilseeds should result in a shift in acreage back to grains in 1998 (at the expense of oilseeds) in the United States and on a world basis.
Price Impact: Potentially constructive to all members of the soy complex.
EL NINO: The El Nino episode continues to strengthen as sea surface temperature anomalies widen, exceeding the record levels seen in 1982/83. History indicates that Brazilian soybean yields tend to be high when an El Nino is in force after planting, but there is a less consistent effect on Argentine yields. Given the greater area planted in Brazil, good yields there should outweigh any possible yield problems in Argentina. However, Argentina had a drought last year and history favors a yield recovery; the only previous instance when yields did not recover from a sharp decline the prior year was 1975. Adding to the likelihood of a yield rebound is that soil moisture in soybean areas has improved. Although many expect U.S. yields in 1998 to be adversely affected by the El Nino, there is no historical evidence for that expectation. Still, the expectation itself probably will be a price-supportive factor.
The real impact of El Nino on the soy complex is likely to result from reduced production of tropical oils (palm, palm kernel and coconut) due to the recent Southeast Asian drought, which continues in Indonesia. These oils account for slightly more than half of the world vegetable oil trade. The Philippines is the dominant coconut oil producer; production declines tend to follow below-normal rainfall, which is forecast for 1998. Malaysian palm oil production is also likely to decline in the 1997/98 season. However, more trees and a higher share of trees in the peak production phase in Indonesia could outweigh yield declines resulting from drought and smog. Indonesia's production has grown faster than Malaysia's, but domestic usage is larger, thus permitting a smaller quantity to be exported,
Price Impact: Bullish on soybean oil.
ASIAN ECONOMICS: Increases in world consumption of meal and oil have been fueled largely by tremendous economic growth in the developing countries of Asia. However, that growth is slowing, even in China, which had been experiencing double-digit annual increases in GDP. The recent currency depreciation in Southeast Asia and the resulting stock market declines are indicating a possible decline in economic activity. The currency devaluation is likely to have an adverse impact on imports of soybeans and soybean meal by Asian nations, although it is too soon to tell how serious the effect will be in the more developed economies of Japan, Taiwan and South Korea. The decade between 1986/87 and 1996/97 saw Asian soybean meal imports increase to 29% of world soybean meal trade from 6% while the European Union, Eastern Europe and the Former Soviet Union combined saw their share decline to 43% from 78%. The increased dependence of world soybean meal trade on Asian buying makes their economic situation a factor to watch.
Price Impact: Potentially bearish on soybean meal and soybeans, but bullish on soybean oil if world production Is cut more than world exports.
U.S. FEEDING PROFITABILITY: Expanding livestock production is reducing pork and poultry prices more sharply than lower corn prices are reducing feed costs. The result has been a reduction in feeding margins. Also, after a decade of growth in meat exports that provided an additional outlet for U.S. production and added to feeding profitability, the export outlook is changing. The share of broiler production that is exported is forecast to decline, while the share of pork production going into export channels should stagnate in 1998. The increase for beef exports is more a function of lower total production than higher exports. The poultry and pork sectors are the main consumers of soybean meal, and reduced feeding profitability threatens to halt or even reverse expansion plans at some point in 1998.
Price Impact: Potentially bearish for soybean meal and soybeans, but bullish on soybean oil.
CHANGE IN LEADERSHIP FROM MEAL TO OIL: Last year's demand bull market for soybean meal pressured the oil share of the joint product value to its lowest level since 1973. However, factors indicating that the 1997/98 season should mark a major change in the meal/oil price relationship include: (1) the prospects for waning soybean meal feed demand; (2) a record South American soybean crop adding more to world meal supplies than to world oil supplies; and (3) a decline the production and exports of tropical oils.
Price Impact: Bullish on soybean oil.
CYCLICAL FACTORS: A cyclical low has occurred in monthly average soybean oil prices every three or four years, and appears to have been made in December 1996. (The futures low appears to have been set at 21.25 cents per pound in August 1997.) The number of months from the low to the high in the cycles has ranged from seven to 34, with an average of 21 months and a median of 22 months. These statistics would indicate a high in September or October 1998, but potentially as late as October 1999.
Price Impact: Bullish on soybean oil.
MANAGED MONEY: The amount of money in managed futures accounts has expanded rapidly this decade, but money in hedge funds has grown at a much faster pace. (The hedge fund growth is a bit misleading because their assets include unleveraged equities positions.) The futures markets are too small to have much, if any, of the total position held by hedge funds, but a large-scale or well-advertised factor (such as El Nino) may bring a larger portion of hedge fund money into commodities. (This appears to already have occurred in soybeans and corn.) On the theory that these funds have an investment mentality more than a trading mentality, we would expect them to be positioned more frequently on the long side and to have greater “staying power” on setbacks.
Price Impact: Potentially constructive for soy complex commodities in general, but especially for soybeans, the most liquid market of the three.
Anne Frick
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