PRUDENTIAL SECURITIES, INC.
One New York, New York, New York
(November 21, 1997) SOYBEANS: THE LONG AND THE SHORT OF IT–Where Are We Now And How Did We Get Here?: Figure 1 shows monthly soy complex futures prices from January 1985 through October 1997. Soybeans have been in a 2½-year bull market, led by meal, as expanding feed demand in the, United States and (especially) Asia outpaced the increase in soybean production. The “protein story” culminated last season with extremely tight soybean supplies, high prices last spring and a low oil share of joint product value: oil prices, in a bear market for three years, were independently weak. The increasing importance of South American production held the rally below levels reached by prior bull markets, thus maintaining the demand base and leaving little room for crop problems.
In The Soy Complex
Source: PSI Research Analyst Forecasts
Where Are We Going And What Could Happen To Change The Situation?: Table 1 shows our anticipated price action in the soy complex. We expect soybeans to continue trading more with meal than oil. Without a U.S. drought next summer, we do not expect last spring's highs of $9.03 per bushel in soybeans and $308 per ton in meal to be penetrated. Instead, we look for a rally into the January-March quarter that may “test” the highs (not strongly) before soybean and meal prices decline in the spring on the addition to world meal supplies from a record South American crop. Oil prices are likely to break out of their bear market (which has probably already ended) and rally into a high to be established any time between the summer of 1998 and the summer of 1999, depending on U.S. growing weather this season, soybean meal demand and the extent of El Nino- related drought damage to production of tropical oils.
SOYBEAN MEAL–Bullish Factors Through March 1998:
–Record U.S. usage and early season usage/supply ratio, spurred by sharply reduced South American supplies.
–Need for a record South American crop to augment depleted U.S. supplies in the spring.
–Concerns about a U.S. drought in 1998, partially because of El Nino. Large domestic meal usage due to high animal numbers increased fund participation in the soy complex markets.
–Competition with grains, primarily corn, for planted acreage.
–Slow pace of farmer selling.
Risks to this scenario:
–Early waning in high usage pace.
–Early effect of weaker Asian economies and currencies.
–Transportation problems delaying or discouraging consumption.
–Aggressive U.S. farmer selling early in the new tax year.
Bearish factors for Spring/Summer 1998:
–Prospective record South American soybean crop adding to world meal supplies.
–Slowing U.S. meal consumption due to waning feeding profitability.
–Seasonal slowing in U.S. soybean crush.
–Slowing U.S. soybean and meal exports due to increased South American competition.
–Waning Asian demand for meat and feed (meal) imports as a result of currency weakness and slower economic growth.
–Prospects for adequate U.S. carryover and a higher carryover/usage ratio than prior year.
–Increased wheat feeding displacing meal in rations.
Risks to this scenario:
–Reduction of more than 3% in U.S. soybean planting intentions.
–Maintenance of high U.S. export pace because of problems in South America with harvest, transportation or port capacity.
–Low soil moisture in United States heading into planting season.
–Drought.
–Crop prospects, particularly for corn, high enough to maintain feeding profitability.
–Resiliency in Asian economies and, hence, in feed demand.
–Bullish influence on soybeans from price strength in soybean oil.
SOYBEAN OIL–Bullish factors through March 1998:
–Technical indications that cyclical low is in place.
–Outlook for declining tropical oil production in 1998.
–Prospective decline in Malaysian palm oil stocks, firming palm oil prices from a discount to a premium relative to soybean oil.
–Uncertainty about South American soybean production and Argentine sunflowerseed production.
–Increase in U.S. exports to offset reduced South American supplies during the first half of the crop year.
–Increased fund participation in the market.
–Tight domestic refining capacity.
Risks to this scenario:
–Higher-than-expected U.S. soybean oil yield.
–Change in China's import policies, or other factors causing a reduction in China's soybean oil imports.
–Drop in apparent domestic usage as “invisible stocks” are consumed.
–Long liquidation by funds.
Bullish factors during the second half of the crop year and longer term:
– El Nino-related outlook for drought - reduced production of palm oil, palm kernel oil and coconut oil, which combined account for about half of the world vegetable oil trade.
–Prospects for waning crush in second half of the crop year.
–Prospects for reduced feeding profitability in the United States as meat export outlook softens and higher production reduces hog and broiler prices.
–Reduced meal demand resulting from weaker currencies and economies in Southeast Asia.
–Rotational considerations shifting acreage from oilseeds to grains oil world basis and in United States.
Risks to this scenario:
–A more moderate El Nino impact on tropical oil production than in the past or than currently expected.
–Resiliency in Asian economies continuing to support feed demand.
–Financial, banking or economic problems in China slowing the economic growth rate to a level where import demand might be affected.
–Increased South American oilseed plantings in 1998.
–Biotechnology policy working against soybean oil consumption in edible products.
Anne Frick
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