MERRILL LYNCH & CO.
North Tower, 21st Floor, New York, New York
(November 13, 1997) SOYBEANS: The USDA's November production estimate was 2,736 million bushels (39.2 bushels/acre yield) compared with the October estimate of 2,722 million bushels (39.0 bushels/acre yield). This was right in line with the average of private estimates. Soybean prices had rallied substantially ahead of the report, possibly positioning for a bullish surprise. Consequently the report was neutral to bearish. However, prices continued to maintain strong underlying support due to record early season usage rates and some uncertainty regarding Brazilian planting progress.
The upward revision in the USDA's November crop estimate suggests a historical tendency for some additional small upward revisions in the January and final crop estimates. In the 28 years since 1950, in which November crop estimate increased, the January and final estimates were above the November estimate in 19 and 18 years respectively. Based on this observation, we expect that a further slight increase of around 10 million bushels is likely.
The USDA reduced U.S. ending stocks to 255 million bushels from 270 million last month as increases in consumption more than offset the increase in production. In particular the USDA increased exports by 20 million bushels to 980 million, acknowledging the blistering pace of exports during October.
Ending stocks of 255 million bushels represents a substantial increase from last year's exceedingly tight 132 million bushels. Consequently, this year does not appear to have nearly the dynamic potential of last year, unless South American crop problems develop. However, the continuation of record usage through March could buoy prices into early 1998.
Cumulative usage through November 7 is estimated at 544 million bushels, surpassing the previous record pace of last year by 100 million bushels, or 23 percent. However, exports may start to decline relative to year ago levels if a prolonged slump in export sales develops, i.e., sales under 15 million bushels per week. A pickup in export sales during December may be needed in order to maintain a supportive demand situation.
The USDA increased its estimate for the Brazilian and Argentine soybean crops by a combined 1.3 million tonnes. The Brazilian crop was estimated at 29 million tonnes compared with 28.0 million last month. The Argentine crop was put at 14.5 million tonnes compared with 14.2 million last month. The USDA's estimates are now more in line with private estimates, but still appear conservative if favorable weather prevails during January-March.
There have been some early weather related concerns for the Brazilian crop. These have consisted primarily of potential planting delays in Southern areas should the recent wet weather pattern continue into late November and December. Late plantings would delay the harvest and increase the window for U.S. exports in March. Recent weather forecasts are suggesting a timely shift towards a more favorable weather pattern, but the situation will have to be monitored closely. Weather problems in South America, could make prices this spring as dynamic as last year's.
The outlook for extending price gains into early 1998 depends on maintaining a constructive outlook on demand. Record high U.S. consumption rates appear in place for the near term. Crop problems in South America would be a major bullish feature. Conversely favorable crop developments would pressure prices, especially starting in January. A persistent slump in export sales in the months ahead would be major factor undermining the extent of any post harvest rally.
We favor establishing long positions towards the low end of our projected ranges.
SOYBEAN OIL/MEAL–Soybean meal prices rallied to new contract highs ahead of the USDA's Crop Production report. This coincided with significant gains in the bull spreads. The price strength was driven by the outlook for a significant increase in exports during November-January contributing to an further tightening of supplies. Crush was already running at around 90 percent of full capacity and further increases in usage would require higher prices to curb consumption, or encourage higher foreign crush rates from imports of U.S. soybeans.
A sharp decline in South American exportable supplies, projects to be a major factor supporting U.S. exports this fall and winter. South American exportable supplies of soybeans and meal during October- March are estimated at 5.3 million tonnes of soybean meal equivalents (SBMEQ), down 2.6 million tonnes from last year. This is the lowest level of competing exportable supplies since 1987/88 and is the largest annual decline in over 11 years.
However, the U.S. is not the only store in town. An increase in Indian soybean meal exports could help to offset a portion of the decline in South American supplies. Indian meal exports for 1997/98 are estimated at 3.0 million tonnes compared with 2.4 million last year. As of early November, only 1.1 million tonnes have been committed for export compared with 1.6 million a year ago. Consequently, India has 1.9 million tonnes left to sell compared with 800 thousand tonnes last year, a substantial increase of 1.1 million tonnes.
For the near term, prices are expected to be supported by a constructive demand outlook, both export and domestic. However, aggressive Indian sales in the months ahead could significantly temper further strength in prices and the bull spreads. With favorable South American crops, longer- term export demand is uncertain, especially in view of potential declines in South East Asia (currency and economic turmoil). With adverse crop conditions in South America, the price outlook for the spring/summer period could become explosive.
We would favor buying soybean meal on corrections towards the lower end of our trading range.
Soybean oil prices continue their relentless climb, fueled by active fund buying.
Despite the high crush rates, U.S. soybean oil stocks are not showing signs of any strong build, indicating constructive consumption rates.
Soybean oil exports have been high in recent weeks, thanks to shipments to China, but new sales have become relatively low, and open sales could soon fall to below year ago levels. Near-term support may depend on a sizeable pickup in export sales in to prevent disappointing the export bulls, i.e., export sales consistently over 20 thousand tonnes per week.
With funds holding a record large net long position, soybean oil prices could also be vulnerable to some pressure from liquidation of the relatively large December open interest ahead of first notice day.
The longer-term outlook for U.S. soybean oil exports is very supportive. For 1997/87, exportable supplies of competing oils (Brazilian and Argentine soyoil, Argentine sunoil and Malaysian palm oil) are projected to decline by a historically large 235 thousand tonnes. This would be in sharp contrast with increases of 626-970 thousand tonnes in recent years. Furthermore, the decline in exportable supplies of competing oils is occurring at a time of relatively low global oil stocks. This suggests the potential for a stronger shift in foreign demand to U.S. soybean oil. The tightening in foreign oil supplies is expected to become increasingly more pronounced as 1998 progresses, presenting a longer-term supportive force for soybean oil prices.
We favor buying soybean oil on pull backs towards the low end of the projected range.
Mario Balletto
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