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(August 11, 1997) SOY COMPLEX: SOYBEANS–The key factor of the week will be the USDA's initial survey-based production estimate to be released Tuesday morning, August 12. The USDA also will issue its world and U.S. Supply/Demand reports for both the old and new crop that day.
We expect the USDA to leave its old-crop carry-over projection at 125 million bushels. We look for the USDA to raise the crush estimate 10 million bushels to 1.435 million by reducing exports a similar amount to 880 million, but these projections may be conservative. To meet an export estimate of 880 million, weekly export inspections would need to average 7 million bushels a week through August, and it has been seven weeks since weekly inspections exceeded that figure. To meet a crush estimate of 1,435 million, the weekly crush reported by the National Oilseed Processors Association (NOPA) would need to average only 22.9 million bushels per week, and there have been only two weekly figures below that level in the last three months.
The USDA's new-crop supply/demand figures will depend heavily on the reported crop size. The range of projections for the August crop estimate is 2,600 million to 2,750 million bushels. It is worth noting that there is a greater tendency for the crop size to increase into the January final report than to decline. Another historical tendency is that if the August yield exceeds last year's yield (37.6 bushels per acre), the final yield also is likely to exceed 37.6 bushels. We expect the USDA to leave its new-crop crush estimate at 1,470 million bushels if production is on the low end of the expected range and increase it to 1,480 million if production is on the high end. We expect a slightly larger adjustment in the USDA's new-crop export estimate, which we think would be retained at 930 million bushels under a low-production scenario and increase to 950 million bushels if production is on the high side. Based on the range of production estimates, we expect the USDA to peg new-crop carryover between 250 million and 325 million bushels.
The market's attention has been focused on the supply side and the likelihood of a record crop. One of the key supply features for 1997/98 is the shift in acreage back into oilseeds from grains. U.S. soybean plantings are the highest in 15 years. and it would take a national average yield under 36.0 bushels per acre to hold production below the prior record of 2,517 million bushels. World production of other oilseeds also is likely to increase, as was indicated in the USDA's world production estimates in July. One notable exception could be China, where the drought (eased somewhat by early August rains) appears to be reasserting itself. This factor threatens soybean production at a time when China already is expanding imports in order to offset a domestic production deficit.
The large supply prospects have diverted attention from the large usage outlook. The 1997/98 crop year looks likely to be another in which early season usage is exceptionally high relative to supplies, resulting in counterseasonal price strength during the January-March quarter. South American soybean plantings are expected to increase, and if yields recover from this year's drought-reduced levels, record South American soybean crops next spring could again cap rallies in U.S. soybeans. However, the large usage base will leave little room for crop problems in South America this winter or in the United States next summer.
There are five major background factors that should keep soybean prices volatile in the 1997/98 crop year:
1. The demand base remains high because the assumed availability of supplies from the alternate hemisphere has kept price rallies below levels that would ration usage.
2. The emergence of China as a major world purchaser of oils, meals and (to a lesser extent) soybeans, supports the consumption side of the equation.
3. Grains and oilseeds are likely to continue competing for acreage not only under new, less crop-specific planting policies in the United States but also on a worldwide basis. The outlook for tightening world grain supplies in the 1997/98 crop year could pull acreage from oilseeds in 1998.
4. The El Nino should result in a reduction in tropical oil supplies in the last half of the 1997/98 crop year.
5. The season that followed years in which an El Nino began in the spring appear to have a greater-than-normal chance of producing below-trend soybean yields. Although the relationship appears spurious, the fact that it will have been a decade since the last major U.S. drought will keep market participants on close watch for signs of dryness next spring.
November beans have a potential crop-scare rally high in place at $6.75 per bushel, but that will depend on whether much-needed moisture is received in the southern Midwest and Delta as the soybean crop is now entering its critical yield-determining, pod-filling stage. If the rally high is in place, then the next move should be a decline to the harvest low.
There are two common time periods for a harvest low in years with fundamentals similar to those we expect this year–August or October. In a year with an unusually high early season usage rate, as we expect this year, harvest lows tend to be made in August. However, the harvest low tended to occur in October in the four prior years when new-crop carryover increased after two consecutive carryover declines (as appears likely this year). The resolution of this conflict may be that in years when a harvest low is made in October, there appears to be a pattern for an interim low in August that is not penetrated during September. There were seven years since 1970 when new-crop soybean production exceeded old-crop usage by at least 10%, as should be the case in the 1997/98 season. After figuring the harvest low as a percent of the spring high (ignoring any crop-scare rallies) in these years, the average percentage would project a low this year of $5.66. Eliminating all the individual projections already penetrated would result in an average projection of $5.32. We consider the $5.66 level (approximately) to be a likely candidate for an interim low in August. If soybean prices make a new low in October, we would expect the market to find support in the $5.32 area.
SOYBEAN MEAL–Old-crop prices continue to trade at a wide premium to new-crop, reflecting uncertainty about late-season soybean availabilities. However, weekly crush has exceeded prior expectations, indicating that crushers have been able to obtain soybeans. As a result, processors' soybean basis levels have declined, permitting profitable crush margins despite periodically weak meal basis levels. In its supply/demand report on Tuesday, the USDA is likely to increase its projection of old-crop crush by 10 million bushels, which would boost domestic soybean meal production 235,000 tons. However, as weakening meal basis levels indicate, some of the production increase may not find a home and is likely to go into ending stocks. (Stocks of meal are always minimal relative to consumption.) We look for the USDA to increase by 100,000 tons both its export and domestic usage figures as well as add 35,000 tons to ending stocks.
New-crop soybean meal prices continue to be influenced by the production outlook for soybeans. While it currently appears likely that new-crop soybean supplies will be adequate to cover prospective crush requirements, meal demand in the first half of the crop year is expected to outweigh oil demand, requiring that meal carry a larger-than-normal share of the joint product value. The good new-crop meal consumption outlook stems from the following factors:
1. Feeding profitability is improving and animal numbers are projected to expand, which should boost domestic consumption to a ninth consecutive record. In July, the USDA projected that 1998 pork production would increase 8%, although hog numbers (the relevant factor for soybean meal consumption) will be up by a smaller percentage. Broiler production in 1998 is projected to increase 6% while turkey production is forecast to rise 5% after declining 1% in 1997. Egg production is expected to be up 3%.
2. The key factor in the meal export outlook will be reduced supplies available from South America during the October-March semester. Even with record soybean imports of 100,000 tonnes by Argentina and 2.2 million metric tons (MMT) by Brazil during the period, available soybean meal export supplies appear likely to decline 1.26 NEWL We expect the compensating increase in U.S. meal exports during October-March to be 800,000 tonnes, or only two-thirds of the South American export decline. Even so, we are projecting U.S. soybean meal exports of 8.05 million tons in the 1997/98 season.
3. Expanding meal consumption in Asian countries is also likely to increase U.S. soybean meal exports. After two mediocre crops, drought threatens to reduce China's soybean production this year. If so, Chinese import demand could increase beyond what was already expected if it had produced a good soybean crop.
4. The El Nino is reducing South American fish meal production. Although fish meal exports from Peru and Chile account for only 5% of world meal trade, its higher protein content requires about 48% more soybean meal in replacement. If fish meal exports from these two countries decline to the extent they did in 1983, when the previous intense El Nino occurred, it could require additional soybean meal exports of 1.34 MMT to compensate for the lost protein supplies.
5. A final, nebulous factor–but one worth considering–is that large supplies tend to generate large usage. This occurs because supplies are recognized more quickly than usage and generate a complacency about the pace of offtake that helps keep prices from rationing usage. Because soybean meal is a by-product, its potential supply will be affected by soybean availabilities. However, the combination of increased U.S. crushing capacity and a record soybean crop should help boost soybean crush and, hence, soybean meal consumption.
U.S. meal consumption should be heavily front-loaded in the new crop year. South American soybean plantings are currently expected to expand significantly while yields should recover from last spring's drought-reduced levels. Hence, a large share of world imports should shift to South American supplies after April 1998. The case for large early-season U.S. consumption is strong. The question is whether the expectation of a large South American soybean crop will limit rallies that occur in response to the heavy U.S. offtake. This past year, the bull market peaked a month earlier and at a lower level than the history of prior demand-bull years indicated. We expect that it will be difficult to rally meal prices after January-February if the South American crop outlook is good, but that large meal consumption will be a constructive factor for prices in the October-February period. The constructive price effect of large, early season consumption may be enhanced if (as seems likely) domestic users have kept new-crop coverage light in anticipation of large U.S. soybean production. In Europe, consumers appear to be on a hand-to-month basis, and new- crop coverage there may also be light. If so, the expansion in new- crop usage should be a constructive factor for prices.
Old-crop soybean meal prices are unlikely to penetrate their early July lows. The comparable low in the December contract was $186 per ton. A potential peak in the crop-scare rally was made at $222 last week, but prices could penetrate that level if dryness persists. Unless production estimates decline in reports subsequent to the USDA's August offering, we expect the $186 level to be retested and look for a “harvest low” in meal in the $180-$185 range.
SOYBEAN OIL–Soybean oil remains the weakest member of the soy complex. The oil share of the joint product value, basis the August contracts, declined below 30% last week. Although U.S. soybean oil stocks have begun their seasonal decline, the erosion will be very moderate this year because weekly soybean crush levels have declined less than what would be normally expected. As a result, stocks will remain more than adequate by historical standards, obviating an economic need for prices to rally.
World vegetable oil prices have been declining and, more importantly, rapeseed oil and palm olein prices have dropped relative to soybean oil. U.S. soybean oil prices in July became less competitive with South American soybean oil and should have hurt U.S. exports.
Ironically, weekly shipments indicate that exports in July increased, largely because of some price-discounted exports to China. We are projecting July soybean oil exports at 140 million pounds (with China accounting for 63 million pounds) versus an average of 65 million pounds per month in the April-June quarter. Our crop-year export estimate remains 1,900 million pounds versus the USDA's projection of 1,800 million.
We expect the USDA to increase old-crop soybean crush 10 million bushels in Tuesday's report, which would add 110 million pounds to soybean oil production. We also expect the USDA to increase its domestic usage by 100 million pounds and add 10 million pounds to its ending stocks figure of 1,775 million pounds. Domestic usage was 5.3% above the prior year's level through the first three quarters of the crop year.
Old-crop ending stocks should be near 1,800 million bushels, which would represent an ample level. Any possible tightness in soybean availabilities for crush as the 1996/97 season ends is unlikely to constitute a major threat to soybean oil supplies.
As the new crop year begins and crush increases to meet soybean meal demand, soybean oil stocks are likely to build. However, the extent of the increase will hinge on soybean oil yields. Thus, a key factor to monitor will be the temperatures during pod filling, which are directly correlated with soybean oil yields. Weather to date this year has been cool, and the National Weather Service has forecast below-normal temperatures in the Midwest during soybean pod-filling, which could prevent a recovery in oil yields in 1997/98. Given our projection for a record new- crop soybean crush, each change of 0.1 pounds pet bushel in oil yield equates to 150 million pounds in oil production. The yield factor could mean the difference between a potential tightening in soybean oil stocks or an addition to the current surplus.
A long- term positive factor for soybean oil prices is the presence of an El Nino. Sea surface temperatures off the western coast of Peru averaged 3.3 degrees Celsius above normal during July, the largest anomaly since June 1983. The Southern Oscillation Index (SOI), which had moved from a strongly negative number to near even in early July, declined sharply again in late July, indicating that the current El Nino continues to intensify. The El Nino is causing a drought in Indonesia, Malaysia and the Philippines that should reduce palm oil, palm kernel oil and coconut oil production beginning in last half of the 1997/98 crop year.
The Indian monsoon is weaker than normal this year and bears watching, although rainfall in soybean-producing areas appears to have been adequate to date. There are reports that soybean plantings in India may have increased more than earlier thought, which could offset some yield decline. Canadian canola growing conditions have been too hot and dry, which has reduced crop estimates closer to 6.0 MMT from the earlier levels of 6.3-6.8 MMT. However, because acreage was up sharply this year, it still appears fairly certain that the crop will exceed last year's level of 5.04 MMT. China has been plagued by hot, dry conditions in major soybean growing areas this year. While timely rains were received in early August, it now appears that the detrimental weather is returning.
U.S. soybean oil exports should increase in the 1997/98 season for three reasons: (1) effects of the El Nino; (2) crop problems in China; and (3) the reduction in exportable supplies of soybean oil from Brazil early in the crop year. If the USDA boosts its new-crop crush estimate in Tuesday's report, we expect the resulting increase in soybean oil production to be placed in the export category.
New-crop domestic usage is likely to exceed that of the current year, but the USDA is already reflecting a 250-million- pound increase in its balance sheet. If the old-crop domestic usage figure is increased, it is likely that the department will raise its estimate of new-crop usage by a similar amount.
The new-crop soybean oil balance sheet could have a constructive tone, if (as appears likely) the USDA increases both exports and domestic usage, which should result in a reduction in the new-crop ending stocks estimate. However, the constructive fundamentals for soybean oil are not likely to appear prior to the middle of the 1997/98 crop year. In the first half of the year. the relatively stronger consumption of soybean meal should keep soybean oil prices under pressure.
December soybean oil prices appear to be establishing a base in the 21.80- to 22.00-cent-per-pound area. This may prove to be the low if U.S. soybean crop prospects continue to deteriorate. However, if soybean production estimates increase from the USDA's August report. we would expect December soybean oil prices to penetrate their recent low of 21.80 cents. We see downside risk in December soybean oil to the 18.50-cent level in the October-December quarter. There is resistance over the market in the 23.65- to 23.75-cent range.
Anne Frick
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