wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(November 10, 1997) SOYBEANS: Despite record supplies, demand has been running at an exceptionally high pace relative to those supplies, so that this year falls into the category of a classic demand bull market. Although the USDA's November crop estimate, to be released on the morning of November 10, could change the level of total supplies and carryover, it is highly unlikely that the crop size will exceed the 3.1 billion bushels that would be needed to push this year out of the demand bull market category.
The combination of weekly records in both exports and crush pushed usage to a record 84.1 million bushels for the week ended October 23; total usage declined only slightly in the subsequent week. We consider fundamentals bullish for October- December if usage exceeds 27.5% of October 1 supplies, and we expect this year's early season usage percentage to reach a record 32.6%, barring an increase in the final crop size from the October report. The hallmark of demand bull years is a counterseasonal price rally into the January-March quarter. In such markets, soybeans often peak in the April-June quarter, but prospects for a record South American soybean crop to be harvested in the spring of 1998 should cause a peak in soybeans and meal during the January- March quarter instead. A rally in the spring would probably be associated with new-crop, rather than old-crop fundamentals.
Once the market has digested the November Crop report, it will focus on the high pace of U.S. usage and on crop prospects in South America. One of the reasons U.S. soybean usage is so large this season is that U.S. supplies are augmenting the sharply reduced South American soybean supplies. Record exports depleted Brazilian, supplies, and Argentine supplies were reduced by drought. As a result, we expect the following consequences:
1.) Although Brazil and Argentina are importing U.S. soybeans to augment their supplies for crush, these purchases are not expected to be high enough to fully offset their lost product production. Under Brazil's “drawback” scheme, soybeans can be imported without the 8% duty as long as the importer re-exports the products produced from those beans. Normally, Brazilian crushers will export products crushed from their new-crop beans in fulfillment of this requirement, using the products from the imported beans in the domestic market. However, the “drawback” period has been shortened to 90 days from 180 days. This means that beans imported more than 90 days ahead of the availability of products from new- crop beans (which won't be until about March), must be imported solely to re-export product. As a result, it is possible Brazilian imports could be pushed more heavily into the new calendar year, increasing the need for crush in other countries such as the United States, India and Europe until then. If domestic product shortages develop, then widening crush margins will be needed to encourage earlier imports. Argentina, which will be importing soybeans for the first time this year, apparently stepped up its purchases last week.
2.) There will be greater demand for U.S. soy product exports than last year, which in turn should translate into increased U.S. soybean crush.
3.) Because of crushing capacity constraints in the United States, European crush also will need to increase to help fill world meal needs, thus their soybean imports should rise.
There has been talk about a potential devaluation, or even a float, of the Brazilian Real. After the initial currency crises the week before last, the Brazilian government stabilized the real by doubling interest rates. Because soybeans in the world market are traded in U.S. Dollars, any devaluation of the real would discourage imports (which would cost more in local currency) and encourage exports (as U.S. Dollar proceeds would be converted into more domestic currency units). This could allow exporters an advantage in competing with crushers for domestic Brazilian soybean supplies.
It remains to be seen whether depreciated currencies in Asia and in Latin America will reduce import demand for soybeans and products, but the effect cannot be beneficial for imports. Also, higher interest rates in those regions may slow economic growth more than previously forecast, thus reducing domestic demand for meat and, hence, feed.
We have raised our projection of crop- year exports to 1,010 million bushels from 978 million, reflecting the record exports during October. We have raised our soybean crush estimate just 1 million bushels to reflect the revision in the September crush data. The carryover figure shown in the USDA's November balance sheet will depend on the production figure. Historically, odds favor a decline in the November crop size in years when the crop estimate was reduced in October, as was the case this year. However, anecdotal evidence would suggest an increase. If the crop estimate were unchanged, our usage figures would result in a carryover projection of 211 million bushels, or 8% of usage. This is still not extremely tight historically, but considering the exceptionally high early-season usage pace, it is not inconceivable that a combination of lower crop size and increasing usage estimates could eventually indicate tightness in old-crop U.S. supplies.
We are looking for soybean prices to rally to the $7.70- to $8.20-per-bushel range, basis the March contract, during the January-March quarter. The uncertainty surrounding the level of South American production in the face of conflicting impacts from El Nino (wet weather in Argentina and southern Brazil and dryness in northern Brazil) could keep prices elevated until the critical growing season in Brazil passes in February. In the spring, however, U.S. soybeans face stiff competition from South American soybeans and meal, which could prove to be a price-depressing factor unless there are signs of a U.S. drought.
SOYBEAN MEAL–Soybean meal prices rallied last week, with the December contract reaching new contract highs. There appeared to be a shift of sentiment in Europe, where crush for oil demand may give way to crush for meal demand. Also, tightening South American meal supplies are a bullish background factor. In the United States, the weekly meal export shipment figure reported in Thursday morning's Export Sales report was the highest of the season at 173,600 tonnes, but that weekly figure will still need to increase into the 180,000- to 200,000-tonne range to meet our export projection of 2.500 million tons for the October-December quarter. The shipments from crushers' plants into export channels were reported at 309,000 tons the week ended November 5, and were second only to the 328,000 tons reported shipped the week ended October 15. Hence, a large export program still appears to be developing, and we still consider the outlook for record soybean meal exports to be the key characteristic of this year's soybean meal fundamentals.
Export commitments as of October 30 were extremely high at 3.167 million metric tons (MMT), up 18% from last year and the equivalent of 3.491 million tons. However, 1.288 MMT, or 41%, of total commitments were sales to unknown destinations, which compares to 24% last year. Commitments to reported destinations are up only 10% versus last year. However, our export projection of 8.047 million tons is up 15% from still-estimated 1996/97 exports. Some of the bookings to unknown destinations probably are for China and will be declared as they are shipped. There are no reported commitments to China this year; last year, there were commitments of 426,000 tonnes to China at the end of October. If China accounts for even 100,000 tonnes of the unknown destinations, that would bring commitments to known destinations to 16% above last year's level, essentially the same as our projected crop-year export increase.
The key factor behind our projection for a large increase in U.S. meal exports is the decline expected in combined Brazilian and Argentine export availabilities during the October-March semester. The decline should occur despite record crop-year soybean imports, which we have projected at 2.2 MMT in Brazil and 350,000 tonnes in Argentina. Argentine soybean meal exports during the first half of its crop year were record large; as a result, remaining exportable supplies now appear likely to decline in the second half of the crop year versus the year-earlier level. Instead of a 1.5 MMT reduction in combined exports from Brazil and Argentina from October 1997-March 1998 that we forecast earlier, it now appears likely that export availabilities will be down 2.04 MMT. This deficit is equivalent to 50% of the U.S. meal exports during the same semester last year (October 1996-March 1997). We expect only 792,000 tonnes (889,000 tons) of the deficit to be offset with higher U.S. soybean meal exports because crush and export capacity constraints probably will prevent the six-month total from exceeding our projection of 4.900 MMT (5.400 million tons). Hence, we project total meal shipments from the three countries combined to decline 11% from last year's level and reach the lowest level since 1992/1993. The remaining deficit will be made up by the meal equivalent of soybean exports. We are projecting a 2% increase in soybean meal equivalent exports (meal plus the meal content of soybean exports) from the three countries combined during October-March, this would follow a 10% increase during the period last year.
U.S. meal exports should be heavily “front-loaded” because of the South American shortage. Over the second half of the crop year, heavy competition from South America could surface at the same time that economic slowdowns in Asia are starting to be felt in feed demand. However, until more is known about the impact of the Asian economic situation, we are leaving our second-half crop-year export estimate unchanged at 2.645 million tons and are retaining our estimate of U.S. meal exports at a record 8.05 million tons. The USDA reduced its estimate to 7.4 million tons from 7.6 million in the October Supply/Demand report. Considering the large sales an the books, we would expect the USDA to raise its meal export estimate in the December report if weekly shipment figures increase this month, as we expect.
Domestic usage is likely to reach a record level this year, mainly due to larger animal numbers. However, feeding profitability has been hurt by the weakness in hog and poultry prices that has occurred on expectations of production increases. Feed prices are still below last year's levels because of lower corn prices, but that may change over the next three months, as the year-earlier corn price level declines. We still think that increases in domestic meal usage are at risk from declining feeding profitability over the second half of the crop year as well as from a weakening meat export outlook.
As was the case last season, we expect soybean meal demand to push crush to record levels and help consume an unusually large portion of this years U.S. soybean supplies early in the season, resulting in a demand bull market. Crush over the October-March period probably has to encroach on capacity levels to produce adequate quantities of soybean meal. Hence, firm soybean meal prices are probably required to keep crush margins high. We expect a rally in meal and soybean prices into the January-March quarter, with the extent of the rally affected by growing weather in South America. We have been looking for the March contract to rally toward $240-$245 per ton, with an outside chance of hitting $280. However, barring a bearish surprise in Monday's USDA report, we are revising our projected high to $260- $280, which is more in line with our projections for other members of the soy complex, i.e., a high of $7.70-$8.20 in March beans and resistance at 26.10 cents per pound in nearby soybean oil.
SOYBEAN OIL–December soybean oil rallied to a new high for the move last week as the locus of tight supplies switched from Europe to South America. Over the last three months, European export business has led the rally in world oil prices, absorbing the production of rapeseed oil, sunflowerseed oil and soybean oil from a record crush July through September. Stocks at bonded warehouses have been declining for a year. Last week, the oil rally in Europe appeared to run out of steam, possibly on the arrival of sunseed and soybean supplies for crush. (Soybeans have a low oil content relative to rapeseed and sunflowerseed, making them an unlikely candidate to solve an oil shortage.) However, meal prices strengthened and trading volume in meal picked up in Europe last week due to dwindling South American export availabilities, which should encourage additional EU soybean crush and help add to soybean oil stocks.
The focus changed to South America last week. Sharply depleted soybean supplies are reducing crush there and, hence, domestic oil supplies are declining. Brazil, which normally imports oil during the second half of its crop year, bought Argentine oil last week, pushing Argentine basis levels higher. Concern that Brazil might cancel (or at least delay) soybean imports because of the change in the drawback scheme was another supportive factor for oil prices. Exportable soybean oil supplies from South America should decline sharply, helping to boost U.S. soybean oil exports, especially in the first half of the crop year.
Gulf soybean oil quotes firmed last week as well and the United States is now competitive with South American export quotes. The weekly shipments shown in last week's Export Sales report for the prior week reached 45,500 tonnes, the highest figure since December 1995; the shipments included 40,000 tonnes to China. We are looking for exports of 700 million pounds during October- December versus 638 million pounds in the same quarter last year. For the crop year as a whole, our export projection is 2,300 million pounds versus the USDA's estimate of 2,400 million.
Palm olein prices have sharply lagged the rally in the other major edible oils, probably because palm oil is in a period of seasonal stock increases. Malaysian palm oil production in October is thought to have declined slightly from the record level seen in September, but a month-to-month reduction in exports is expected to result in end-October stocks increasing to nearly 1.0 million tonnes. The effects of the drought in Southeast Asia are not expected to show up in palm oil production until early 1998, when they should combine with a seasonal pattern of lower stocks to push Malaysian palm oil stocks at the end of March to their lowest level in a decade. Hence, it is likely that the spread between soft oils and palm oil will narrow. The steep discount for palm oil and olein should allow palm oil to garner a larger share of imports for price-sensitive markets such as India, Pakistan and, to a lesser extent, China.
Apparent domestic disappearance of soybean oil during the June-September quarter was up 8.8% from the prior year's level, but much of this increase represented oil in transit or in rail cars on sidetracks. As this oil in “invisible” stocks is brought into consumption, the rate of increase in apparent domestic disappearance is likely to slow.
Although world oil supplies look tight this season, we still expect the soy complex price outlook to be dominated over the next few months by soybean meal, with oil the true byproduct. December soybean oil prices have rallied in an upward-trending channel since August, so the advance still looks technically solid. However, prices are approaching resistance at the spring high of 26.10 cents on the nearest futures chart. There is further resistance in the 27-cent area based on the long-term downtrend line from the all-time high on the monthly soybean oil chart. As meal exports increase and record crush builds oil stocks, we expect the soybean oil rally to take a respite, especially if soybean oil yields exceed 11.0 pounds/bushel. Funds are heavily net long, opening up the possibility of a sharp sell-off on technical weakness. Support is at 24-75 and 24.30 cents, basis the December contract. We expect to see a change in leadership to oil from meal next spring, and retain our long-term bullish stance on soybean oil as well as our long- term price objective over the next 12 to 18 months of 40 cents per pound.
Anne Frick
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