LINNCO FUTURES GROUP

233 S. Wacker Dr., Ste. 2400, Chicago, Illinois

(November 24, 1997) SOYBEANS: The soybean complex continues to be the bull market on the Chicago grain floor, with corn and wheat prices having major price declines. Soymeal has made new contract highs, while oil and beans have tested highs. There is one word that explains the ability of the complex to divorce itself from the grains and that is “demand.” The market has shaken of increased production and slower export sales, making new highs for the move. The question that must be asked is how high can the markets go?

(Mln. Acres)		October		November
Planted			70.9		70.9
Harvested		69.8		69.8
Yield			39.3 		39.0

(Mln. Bushels)
Beginning Stocks	 132		 132
Production		2722		2736
Imports			   5		   4
Total Supply		2859		2872

Crushings		1495		1500
Exports			 960		 980
Seed			  75		  77
Residual		  58		  60
Total Use		2589		2617

Ending Stocks		 270		 255
Stocks/Use		10.4%		9.7%

PRODUCTION–The USDA raised production by 14-million bushels in the November crop report, to a new record of 2.736-billion bushels. The estimate was very close to the average guess, and only the negative reactions of the wheat and corn market did the beans break. The state breakdown in production showed only two states with any major changes. The Illinois crop was raised by 10.7-million bushels, while the Iowa crop was lowered 10.4 million. The next biggest change was a reduction in Nebraska and an increase in South Dakota of 3.5 million bushels. There are few in the trade that would question the results of the crop report, but most would expect a minor increase in the final crop report in January. The market isn't about supplies!

DEMAND–This is what the market is all about, exports. The USDA raised the exports for beans 20 million (960 million) and meal 50,000 short tons (7,450). Bean oil usage was increased 25-million pounds (16,750), while exports remained steady at 2400-million pounds. The reason for the large increases in export projections comes from the strong start to the crop year. The exports lifting for soybeans have seen a new weekly record set October 23 at 52.2 million and was closely followed by 51.4 million the next week. The USDA has released a revised total inspections for October at 173.6 million (a new record), which is well above the indicated exports on the weekly report. The November exports should remain strong and look for the monthly total to be near 160 million. If the November exports meet projections, then the first quarter exports will be a record for any quarter at 375 million, which surpasses the old record set last year during December/January/February of 333 million. If the quarterly exports come in as projected, we will have exported nearly 40% of the yearly total with 9 months remaining. The total bean sales are record large at 413 million or 43% of the new projection, but as you can see we are front-end loaded so far. There is many in the trade that feel the USDA is too low on their export projection considering the amount of beans exported and how little forward coverage is on the books. I have seen estimates as high as 1.025 to 1.05 billion. It is my understanding that the USDA is not that optimistic about the export picture, and was very reluctant to raise exports in this last report. The reluctance by the USDA comes from concerns with Asian Rim economics and projected large South American crops. The whole price discovery will depend on the export trade in all three sectors of the complex.

WORLD–The USDA raised the world soybean production nearly 2 mmt. in the November report, with the increases coming from larger U.S. crop and the expected increases in the South American crop. The USDA raised the Brazilian crop by 1 mmt. to 29 mmt. and increased Argentina 300,000 mt. These South American increases have been discussed in previous growing trends and should not have come as a surprise. The surprise in th report the increase in demand, which was raised 1.5 mint to record 143.22 mmt. The world demand for soybeans has risen nearly 10% over the last three years. The ending stocks are not that tight; the South American production is not in the bin. There is concern about the ability of the South Americans to produce the record crops projected by the USDA, as early planting encountered delays in the largest producing states in Brazil (south) due to wet weather. The early planting report has Brazil at 19% planted versus last years 29%, but is near the 5-year average. The problem is the southern states have received 150 to 300% of normal rainfall during late October/early November. This is typical of El Nino years, but not to this degree of moisture. The previous El Nino years have produced record yields, which still could be the case but there is a question regarding acreage. The South American production is the most important ingredient to the price discovery of the complex due to the strong demand base.

PRICE OUTLOOK–When examining the USDA ending stock projection of 255 million and the world at 681- million bushels, one would think that prices are overvalued. The market currently is building a large weather premium for South America and trading the record weekly usage. The planting window for Brazil is large (early December) and yield potential has not been affected yet. The demand is real, but the question is can it keep this current pace. Recently we have seen export sales pace slow from the 40 plus million a week, to under 15 million. The world currency decline against the dollar has effected most of the major importers (except EU-15), and makes the export projection for these countries suspect. It will take time for fundamentals to change, and the current strong nearby demand reports will continue to keep the market firm as the focus will be “what if the crops in South America are hurt by weather.” If we compare last year's fundamentals and price to this year, to reach $9.00, we would have to increase the U.S. exports and crush by 123 million (ending stocks of 132 million). With the crush nearing capacity most of the increased demand would have to come from the export sector. The world would need to see a cut in South American production by 15% (remember estimated planting are up 10%) to reach last year's world ending stocks without any change in demand. There are a lot of “what ifs” that need to fall in place for the market to reach the extreme highs. I believe the market will spend considerable time trading between $7.00 and $7.70, until we can decide on the final fate of the market. I would look to be a trader at the above parameters, and trading options has great risk/rewards-considering the potential of a big move to either side. The long-term picture is for increased planting in the U.S. next year and another record production (without weather). This would make the best sale on rallies to be the November of 1998, and producers should be looking at pricing a small percentage of next year's production.

Doug Price

Consensus National Futures and Financial On Line Index

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