PRUDENTIAL SECURITIES, INC.

One New York Plaza, New York, New York

(December 15, 1997) SOYBEANS: In its December Supply/Demand report released Thursday, the USDA made no changes to the soy complex balance sheet. Also, the department did not adjust its Brazilian and Argentine soybean crop estimates of 29.0 million metric tons 1MMT) and 14.5 MMT, respectively, or the estimate of China's crop at 13.5 MMT. Table 1 shows a comparison of our balance sheet estimates for 1997/98 with those of the USDA; also included are our initial estimates for the 1998/99 season.

				USDA	PSI Est. PSI Est.
			1996/97	1997/98	1997/98	1998/99
Planted Area (000's)	64205	70850	70850	69350
% Harvested		98.8%	98.5%	98.5%	98.5%
Harvested Area		63409	69816	69816	68310
Nat'l Avg Yield(bu/acre)37.6	39.2	39.2	39

Beginning Stocks	 182	 132	 132	 220
Production		2382	2736	2736	2665
Imports			  10	   4	   5	  10
 Total Supply		2575	2872	2873	2895

Crush			1436	1500	1518	1510
Exports			 882	 980	1015	 887
Seed/Residual		 125	 137	 120	 128
 Total Use		2443	2617	2653	2525
Carryover		 132	 255	 220	 370

C.O. as & Use		5.4%	9.7%	8.3%	14.7%

The USDA will issue its final 1997 crop estimate on January 13. We usually look at the pattern of production estimates as an indicator of the direction and level for the January report. However, this year's crop estimates have displayed a pattern contrary to historically based indications, so we are using the November crop estimate in our balance sheet, assuming that the final production figures will change little from the range of 2,722 to 2,746 million bushels indicated in the first four Crop reports. Also on January 13, the USDA will issue its December 1 Stocks-In-All Positions report, which should serve as a check on its production number. We are projecting December 1 stocks at 2,011 million bushels versus 1,823 million bushels last year. In a year such as this–in which total supplies are not tight, and hence not a concern to the market–a lower-than-expected stocks figure could have a bullish impact by refocusing attention on the high pace of usage relative to supplies.

We are projecting that soybean usage in October-December as a percent of calculated October 1 stocks will be record-high. Based on history, the high usage rate should result in counterseasonal price strength into February. There has been much talk about the weekly usage total failing to sustain the levels seen during October. However, we do not view this as a bearish factor, largely because the October usage levels were not sustainable given supplies. In addition, there is a seasonal tendency for usage to decline from October levels. While it is true that combined crush and exports have fallen below the prior year's levels in two of the last four weeks, it should be noted that those two weeks in 1996 had the highest usage figures of the season and represented the record for weekly usage levels until this year.

South American crop prospects are good, and a record crop is widely expected in each of the four South American soybean producing countries. We have increased our estimate of Brazilian production to 29.5 MMT, although estimates from Brazilian sources appear to be clustered around the 30.0 MMT level. Our Argentine crop estimate of 14.5 MMT also would represent a new record level. Adding crops in Paraguay and Bolivia of 2.8 MMT and 1.26 MMT, respectively, brings our South American crop estimate to 48.06 MMT from 41.3 MMT last year. However, the critical yield-determining period will run from mid-January through March, and the current demand base leaves no room for production problems. This factor should keep prices relatively well-supported into the January-March quarter. Beyond that, the movement of new-crop South American supplies to market should cause downward pressure oil soybean prices.

We are tentatively projecting a decline in both production and usage of soybeans during the new crop year, but are currently forecasting an increase in ending stocks. We forecast a decline of 1.5 million acres in U.S. soybean plantings. Even though the current new-crop soybean/corn price ratio would indicate a slight increase in soybean plantings, we expect crop rotation concerns and weaker soybean prices in the spring to push acreage into corn from soybeans. We are using an estimated trend yield of 39.0 bushels per acre. In the final analysis, the yield will have more impact oil the level of production than acreage. Despite lower new-crop production, higher beginning stocks should permit a slight increase in total soybean supplies to a record 2.9 billion bushels.

We expect a decline in U.S. soybean usage next year, largely as a result of heavy competition from South America. If South America's crop meets our expectations, then the exportable supplies of soybeans and meal available for shipment the first half of the 1998/99 U.S. crop year will increase, which would permit a decline in soybean exports and crush. Based on these preliminary estimates, U.S. carryover appears likely to increase to 370 million bushels from our estimate of 220 million for the 1997/98 season; new-crop ending stocks would increase to 14.8% of usage from our estimate of 8.3% this year.

March soybean prices saw a recent low of $6.95½ per bushel, just 1 cent above the prior low. 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. So, despite, the rather subdued price pattern, we are sticking with our forecast for March to reach a high in the $8.00$8.40 range. However, if further technical weakness develops (i.e., if the $6.94½ level is penetrated), we might have to revise our projection.

SOYBEAN MEAL–The USDA left its soybean meal balance sheet unchanged in the December Supply/Demand report. Prices declined after the report, reflecting concern about the export outlook as a result of the weakness in Asian currencies. The USDA's export estimate was unchanged at 7.45 million tons, a level well below our projection of 8.05 million tons. There is much talk about soybean meal for export starting to back up on the Mississippi River as the result of a slowdown in Chinese purchases. However, the real explanation may be that there has been an unusually long lag between shipments of meal from crushers plants into export channels (as reported by crushers) and actual shipments. In recent weeks, the shipments figures have started to catch up, and last week's number brought the three-week average to a new high for the crop year. We think it is too soon to write off the outlook for good U.S. soybean meal exports this year.

Domestic usage appears to be running at a record pace. Animal number are up, so actual consumption is probably increasing, but some of the apparent increase in domestic usage reflects a build up in “invisible stocks,” partially explained by the meal in transit for export. In the poultry industry, weekly hatchery reports continue to indicate an expansion in broiler numbers. The December 1 Hogs and Pigs report will be released December 29 and is expected to show hog numbers and the pig crop well above last year's inventories. Hence, the domestic usage outlook remains favorable for meal consumption early in the crop year. The risk longer term is that declining feeding profitability (either from lower meat prices, higher feed prices or both) could reduce feed consumption and have a negative impact on soybean meal usage.

In its December Supply/Demand report for meats, the USDA said that economic problems in Asia could reduce U.S. meat exports to that region. The department lowered its projection of beef and pork exports, both nominally and as a percent of production. The poultry balances contained mixed news for soybean meal. The USDA raised its estimate of 1998 broiler and turkey exports, but reduced the production figures slightly from early, optimistic estimates. The USDA is now projecting a 6.1% increase in 1998 broiler production versus its November estimate that called for a 7.0% increase; turkey production is now forecast to increase 2.2% versus an increase of 4.6% indicated last month.

We are tentatively looking for new-crop (1998/99) soybean meal domestic usage to increase at a slower pace than our forecast for this year. Larger soybean supplies for crush could keep meal production at levels where meal must buy its way into usage. If South American soybean production is as large as currently appears likely, there should be an increase in meal export availabilities, leaving large meal supplies to compete with U.S. exports during the first half of the 1998/99 season. Asia–and, particularly, China–will remain an ongoing source of uncertainty. Our tentative projection of new- crop exports calls for a sharp decline from this year's level but represents only a slight decline from the USDA's forecast for the current season.

March soybean meal prices penetrated their late October low of $213.70 per ton. Support below the market is at $206.50-$208.50. We have been projecting a rally in soybean meal prices that accompanies good exports into the January-March quarter, at which point we expect soybean meal prices to peak in the $260-$280 range. We think it is too early to malice any judgment about the pace of meal exports ahead of the official export figure for the first month of the crop year (October), on December 18. The risk to our price forecast is that a slower-than- expected export pace, in conjunction with good South American growing conditions, removes the incentive for soybean meal prices to rally. If the $206.50-$208.50 level is revisited, it probably would be a sign that we need to reduce our projected January-March high, but until then we maintain our forecast.

The USDA made no changes to its soybean oil balance sheet in the December report. However, there may be enough accumulation of current season supply and usage data to result hi some changes in the January report. Although we agree with the current USDA usage forecasts for soybean oil, our oil yield estimate is lower.

The National Oilseed Processors Association (NOPA) will issue its monthly crush report for November early this week. One of the key features will be the soybean oil yield. Historically, the NOPA yield in November tends to exceed the Census Bureau figure, but both numbers are usually below the crop-year average. A NOPA November yield figure near 10.94 pounds per bushel would be in line with our crop-year average estimate of 11.05 pounds. The Census Bureau Crush report is scheduled for December 23. The oil yield in that report has a good correlation to the crop-year average. A yield of 10.88 pounds per bushel in that report would be in line with our estimate.

We are retaining our long-term bullish stance on soybean oil. We still expect the drought in Southeast Asia to have an adverse impact on production of tropical oils. Malaysia's Palm Oil Registration and Licensing Authority (PORIA) will issue November production and stocks data for palm oil on Monday, December 15. The report is expected to show that Malaysian palm oil production began its seasonal decline in November. However, end-November palm oil stocks are expected to increase to a level that should represent the crop- year peak. Stocks are expected to decline into the spring.

The Climate Prediction Center issued an El Nino advisory last week that said the current ENSO episode should continue into the boreal (northern hemisphere) spring. Spring “warm episode” conditions are forecast to continue through March-May 1998, but an accelerated decline in sea surface temperatures is forecast to begin June-August 1998. A similar report from the Climate Diagnostic Center talked about “full blown” El Nino conditions into early 1998, with the current episode at least the second strongest event since 1950. The Center monitors the MEI (multivariate ENSO index) composed of six factors, including sea surface temperatures and the Southern Oscillation Index (SOI). The MEI calculations are done every month in two-month pairs, e.g., November/December and then December/January). This index has a recent peak in July/August, and a widely circulated chart of the MEI showing the current year relative to the prior six episodes has been one factor causing traders to become disenchanted with the El Nino. However, this index is experimental and it remains to be seen whether it provides a more accurate picture than sea surface temperature data alone as to the intensity of an El Nino episode.

We are protecting all increase in soybean oil exports because we expect the El Nino to reduce palm oil production, raise palm oil prices and increase exports of soybean oil as a partial replacement for palm oil. Because palm oil exports are so large relative to those of soybean oil, pound-for-pound changes in soybean oil exports have a much larger percentage impact on soybean oil trade than changes in palm oil exports.

Domestic disappearance in October appears to have been a record for any month, but confirmation must wait until December 18 when October exports will be reported by the Census Bureau. We are looking for only a slight increase in domestic usage in the current season and the new crop year. Normally, in years when domestic usage has increased more than about 6% (as was the case last year), domestic usage plateaus for the following two seasons.

We are tentatively projecting little change in soybean oil stocks during the 1998/99 season, although it is extremely early to have much confidence in these projections. If a world edible oil shortage does develop, then it is likely that U.S. soybean oil exports will exceed the projections shown and the U.S. balance sheet could be tighter. Because oil is generally a true by-product of soybean meal production, the level of crush will be affected by soybean meal demand, which will be sensitive to not only soybean production but also demand for meat and feedstuffs in Asia.

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-cents-per-pound level. However, we are not sure prices will be that weak and expect the 25-cent level to hold. The recent sell-off in oil has been triggered largely by long liquidation of a portion of fund holdings, which has helped put the soybean oil market on a sounder technical footing. We expect a rally into a winter high between 28.00 and 34.00 cents, which is an extremely wide range. We have been tentatively protecting 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. Ironically, although the weakness in soybeans and meal has had a psychologically depressing effect on oil prices, the loss of meal demand would be bullish to oil by reducing soybean crush and, hence, soybean oil production.

Anne Frick

Consensus National Futures and Financial On Line Index

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