PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(December 8, 1997) SOYBEANS: Soybean prices declined sharply last week, primarily on the following factors: (1) concerns about a slowing U.S. usage pace: (2) a lack of fresh bullish news or input to continue fueling the price advance: (3) ideas that slowing economies and currency weakness would reduce Asian imports of soybeans and grain, meal and meat, which would have an indirect, adverse impact on soybean usage; and (4) excellent crop prospects in South America. The weakness turned the technical chart picture negative, spurring long liquidation by funds that further pressured prices. In addition. a general commodity price decline that extended to the energy and metals markets may have been another factor in fund liquidation.
Figure 1 shows the decline in the recent weekly usage pace; in two of the last three reporting weeks usage has fallen below the year earlier level. The fact that usage remains extraordinarily high relative to beginning supplies is being overshadowed by the reality that weekly usage cannot maintain the extremely high pace seen in October that resulted from record weekly export inspections. However, it is worth noting three things:
1. In the past, years with high early season usage/supply ratios tended to display counter-seasonal price strength in the January-February period.
2. The price decline is likely to spur additional usage.
3. The high usage rate will make a large South American crop appear necessary.
The Asian situation remains a source of major uncertainty. Preliminary figures show that in the 1996/97 season, Taiwan, Japan and South Korea took a total of 267 million bushels of U.S. soybeans, or 30% of U.S. exports. It appears likely that weaker Asian currencies will have an adverse impact on their imports of soybeans, but there is much uncertainty surrounding the timing.
Currently, South American crop prospects appear excellent. Planting of Brazil's soybean crop is on schedule at about 80% complete. Soil moisture supplies have improved in the west-central areas and are adequate to surplus in the south. The Brazilian crusher group ABIOVE projected the crop at 30 million metric tons (MMT), while the governmental agricultural finance arm. CONAB, has projected the crop at 29.6 to 30.4 MMT. Both estimates are well above last year's crop of 26.0-26.5 MMT. Argentina's crop is expected to reach a record 14.0 to 15.0 MMT by most sources; the crop is 46% planted. The USDA is forecasting that Paraguay and Bolivia will each produce a record crop of 2.8 still lie ahead and, as is the case with the United States during the growing season, one can expect the possibility of a crop-scare rally at some point. The El Nino lends an air of uncertainty to the crop prospects, but because its effect on Australian wheat production appears to have been less than normal, the market is erasing some of the “El Nino premium” built into prices for other crops. One of the key factors in the spring will be the logistical situation and whether the Asian currency weariness will hold down import demand for the record South American soybean crop that is currently forecast.
Soybeans will compete with corn for acreage in 1998, and the recent sell-off threatens new-crop U.S. soybean plantings. We already expect crop rotation considerations to pull some acreage from U.S. soybean plantings in 1998.
Although the current usage pace remains very high and fundamentally constructive. the technical picture turned more negative with the penetration of the prior low at $7.05¾ in the January contract last week. A move equal to the first leg of the decline would project a setback to $6.87¼ in January and $6.93 in March beans. The key level to watch for support now is $6.87 in January and $6.94½ in March. We have been projecting that prices should work higher into the January-March quarter, and the current usage pace makes us reluctant to abandon that forecast. However, if the key support levels are violated, we may have to adjust downward our projection of a high in the $8.00-$8.40 range. We expect price pressure in the spring if the South American soybean crop is as large as now appears likely.
SOYBEAN MEAL–Soybean meal prices declined last week on ideas that the USDA might be overestimating soybean meal exports. The pace of actual shipments has been slow relative to those reported by crushers in the weekly crush reports. It should be noted, however, that there has been a tendency in recent years for the official monthly Census Bureau export figures to exceed indications from the weekly Export Sales report. Weekly export shipments reported by the USDA have been running behind shipments for export reported by crushers: cumulative shipments indicated in the Export Sales report through October 27 were about 400,000 tonnes behind cumulative shipments for the same period from the National Oilseed Processors Association (NOPA). Note in Figure 2 how closely the two export series (three-week moving average basis) followed each other last year compared with the wide disparity seen this year. It appears that the actual shipments are beginning to catch up, but the NOPA figures were boosted by a large weekly export figure reported on Friday.
The Southeast Asian economic and currency weakness is also raising questions about meal exports. The effect of a 10%-20% decline in meal trade from countries within the Association of Southeast Asian Nations (ASEAN) could produce a reduction in meal exports of 1%-2% in the United States and 2%-3% in world trade. The developed nations of Southeast Asia tend to take their meal in the form of soybeans, although Korea does import soybean meal. The currency weakness is a much more important factor than the economic growth rate, which in most cases is expected only to slow, not stop. The weakness in the Korean Won last week had a psychologically negative effect on the market. It remains to be seen, however, how much near-term impact there will be on world meal trade.
One of the main constructive factors for the U.S. soybean meal export outlook is the reduced availability of export supplies from Brazil, and that situation has not changed. However, as projections of the new Brazilian crop size increase, prospective competition in the second half of the crop year appears more intense. In the meantime, estimates of the Indian soybean crop have increased to 5.35 MMT, the level currently projected by the U.S. agricultural attache, who also increased prospective soybean meal exports to 3.0 MMT from 2.5 MMT a year ago. Port capacity constraints and logistical problems, however, may not permit much more to be shipped from India in the first half of the season.
Domestic soybean meal usage during October appears to have set a new monthly record level. Some of the apparent increase probably resulted from shipments Into export channels that were not yet exported; (unexplained “usage” becomes part of the residual domestic disappearance category). Animal numbers remain large and feeding profitability is still good enough to make another record domestic usage figure for meal look attainable.
After declining last week, the soybean meal market held above critical support. Market participants appear to be trying to balance the constructive psychology surrounding the strong early season usage prospects against the bearish outlook for record South American production, particularly since southern hemisphere weather has turned more favorable for planting and early season development over the last two weeks, thus boosting many private crop estimates. Uncertainty about the impact of the Asian currency weakness, the general decline in commodity prices and the liquidation of long speculative positions in conjunction with the December contract's expiration have been bearish background factors. The most bullish background factor probably has been related to weather uncertainty.
Last week, March meal held above its previous low of $213.70 per ton. Support below that level does not appear until $206.50-$208.50. Should the market reach those lower levels, it may indicate that our forecast for a high of $260- $280 in March meal during the January-March quarter would require a weather problem in South America. However, we believe the statistics for soybean meal still support our forecast for higher prices in the winter. Then, we expect price pressure in the spring associated with the South American soybean harvest.
SOYBEAN OIL–There was a tremendous imbalance of speculative positions on the long side of soybean oil as of November 18. Liquidation of these positions in conjunction with the December delivery period helped trigger additional fund selling and took slightly more than 2 cents per pound out of soybean oil futures prices. The price decline appears to be related to market composition. technical patterns (such as penetration of trendlines and moving averages) and seasonal factors. We view the current price weakness as a buying opportunity for commercials who need to establish long hedge positions.
Asian economic concerns should be more positive than negative for soybean oil prices because oil demand is less price- elastic than meal demand. Hence, if waning meal demand forces a reduction in crush (which also reduces oil production), then oil stocks could decline. This situation would be constructive for oil prices both outright and as a share of the joint product value.
One of the key long-term bullish factors for soybean oil is the outlook for reduced production of Malaysian palm oil and Philippine coconut oil as a result of drought associated with the El Nino. There is a long lead time involved before the effect of drought on tree crops is manifest. The overkill of El Nino press coverage and the fact that one well-known relationship (drought in Australia) was relatively mild this episode are causing a more blase attitude about the potential effects of the El Nino on oil production. We expect Malaysian palm oil stocks to bottom in the spring of 1998. Currently, palm oil prices are trading at a discount to soybean oil, partially because palm oil stocks are still building. However, production has peaked, and stocks usually peak one or two months later; thus, if end-November stocks do increase as some expect, that could represent the top. Once palm oil stocks begin to decline, we would expect an increase in palm oil prices, making soybean oil more competitive in the world market.
China is the dominant and swing customer for U.S. soybean oil. We expect China to increase imports from the United States by 21% to 475,000 tonnes from 393,000 tonnes last year. Export sales specified to China are 120,500 tonnes versus 126,000 tonnes a year ago. There are 65,000 tonnes of sales to unknown destinations on the books this year versus 45,000 tonnes last year. Experience has shown that these are often for China. With U.S. exports so heavily dependent on one large customer, there is a great deal of uncertainty about the final total, but we expect a narrowing premium of soybean oil to palm oil and tightening rapeseed oil supplies to spur additional Chinese purchases of soybean oil.
Domestic soybean oil usage in October appears to have reached a record level. This could represent increases in invisible stocks as a result of the rail transportation situation, or it could represent consumption that has occurred in anticipation of higher prices. We expect domestic usage to stagnate this season after a sharp increase in 1997/98; it is a common pattern for a large increase to be associated with a usage plateau the next two seasons.
May soybean oil price patterns in years fundamentally similar to this one indicate the possibility of a near-term price decline to the 24.25- to 25.00-cent level. Given the propensity for prices to be stronger than expected in bull markets, we would favor the high end of that range–if the low has not already occurred at 25.21 cents. We expect a rally into a winter high in the 28.00- to 34.00-cent range, which is extremely wide. We have been tentatively projecting a high at 31.00 cents, which fits with our current forecasts for soybeans and soybean meal. However, if we change our projections on soybeans and meal, we would need to lower our projected winter high in May oil as well. We still consider soybean oil to be in the early stages of a major bull market, which we expect to last for several months.
Anne Frick
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