PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 20, 1997) SOYBEANS: Soybean prices rallied sharply into last week on the following factors:
–Increasing belief that the crop size, while a record, would not exceed the September estimate of 2,746 million bushels, the highest to date this season.
–Concerns that too many farmers would opt to store their beans rather than move them into consumption channels.
–The outlook for record U.S. soybean usage, with the strongest demand coming early in the crop year when pipeline supplies remain low.
–Concerns that El Nino might wreak havoc with South American soybean planting and possibly hurt yields in South America this winter; however, the latter view is historically unsubstantiated.
–The view that the El Nino might have an adverse impact on U.S. soybean yields in 1998. (Again, this view is unsubstantiated.)
–Ideas that oilseeds may lose acreage to grains in 1998, both in the United States and in foreign countries.
–Short-covering by funds, which had accumulated a sizable net short position on the price decline from the spring high.
After rallying through their summer highs, soybean futures failed to equal their last spring's highs and the rally lost momentum. Futures prices above $7 apparently spurred some farmer selling and soybean movement. Although the pace of harvest movement remains a concern, weekly crush and exports staged their seasonal jump one to two weeks earlier than they had the last two years. The high usage indicates that some beans are moving to market. As of October 12, one-third of the crop was unharvested, which, while less than normal, still represents about 980 million bushels; a large portion of these beans are likely to move into consumption channels.
In 14 of 22 years when the October crop estimate was below the September figure, the crop size declined further in the January report. However, that still leaves a one-in-three historical chance for an increase in crop size, so the situation remains uncertain. We are now using the USDA's October production figure of 2,722 million bushels in our balance sheet and are projecting a carryover of 244 million bushels as a result.
We expect early season soybean usage to be unusually high relative to beginning supplies. With our October-December usage estimate of 812 million bushels (up from 768 a year earlier) it would take a crop greater than 2,965 million bushels (at a yield of 42.5 bushels per acre) to drop the early season usage/supply ratio down into a category we would consider neutral rather than bullish. Two points need to be made regarding carryover. The first is that even with our record usage projections (which exceed the USDA's estimates), prospective carryover is adequate. And, without a tight carryover situation, there is leeway for change in the actual crop size without resulting in a major change in the tone of the fundamentals. Second, with the prospect for oilseeds to lose acreage relative to grain in 1998, the level of the old-crop soybean carryover could become more important if it is needed to augment lower new-crop production; otherwise, once the carryover is deemed adequate, it requires a larger relative change in prospective ending stocks to influence price.
Traders will be watching the pace of South American planting. The Argentine government estimated this fall's soybean plantings at 7.06 million hectares, up 5.8% from last year's level. (The USDA is projecting a 5% increase.) It was too dry during Argentine wheat planting (May through July), which caused some producers to miss their optimal planting deadline. As a result, there are likely to be more single- cropped soybeans planted this year, which should benefit yields. In addition, favorable rains have relieved drought conditions in Buenos Aires and Cordoba. The El Nino should bring wetter-than- normal weather to Argentina, which should benefit yields. The USDA is projecting a 7% increase in Brazilian soybean plantings. Above- normal rainfall has occurred in Brazil's southernmost state of Rio Grande do Sul, the largest soybean producing state, possibly delaying planting. In Mato Grosso, soybean planting has been delayed by a lack of rain. In general, El Nino episodes appear favorable for Brazilian yields. We are projecting the Brazilian crop at 29.0 million metric tons (MMT) versus the USDA estimate of 28.0 MMT, and the Argentine crop at 14.0 MMT versus the USDA estimate of 14.2 MMT. Assuming that Paraguay's crop increases to 3.0 MMT and Bolivia's to 1.25 MMT, total South American production would reach 47.25 MMT versus 41.1 MMT last year. That increase is equivalent to 226 million bushels, or very roughly the size of the carryover we project for the United States this year.
The harvest low in November beans was established at $6.02 on August 18 this year. The price pattern to date, and the prospective usage-to- supply ratio are characteristic of a demand bull market. We are looking for this year's market to have a price pattern consistent with that of a minor bull market, i.e., a high in the January-March period that is not exceeded in the spring. The large usage outlook for U.S. soybeans through the winter months should permit prices to rally into the January-March quarter. However, the outlook for a record South American crop in the spring is likely to pressure prices from February or March onward. Because a record South American crop is not yet assured, we would look for one or more crop-scare rallies during the winter.
We look for a setback to the $6.60-$6.80 level in March beans late this month or in November, and then a rally to a winter high in the $7.70 to $8.20 area. A price decline appears likely in the spring in association with new-crop South American supplies, but indications of a sharp acreage reduction or low subsoil moisture in the United States might be overriding considerations.
SOYBEAN MEAL–Soybean meal prices rallied to a high of $239.50 per ton last Monday but then spent the remainder of the week declining. Despite concerns about the pace of soybean movement, crush was able to reach a record high weekly level for the week ended October 15. As a result, meal basis levels have softened in some locations. In the near term, the extent of the meal sell-off may still be determined by soybean prices and the movement of soybeans into usage channels.
Soybean crush is expected to reach a record level this year to accommodate larger soybean meal consumption, especially soybean meal exports, Export bookings as of October 9 reached 3.038 million tons, exceeding the 2.122-million-ton level seen for that week in 1979, the year when meal exports were a record 7.909 million tons. Actual weekly shipments are off to a slow start. However, the weekly export figure in the crush report from the National Oilseed Processors Association (NOPA) reached a record level of 328,000 tons last week and should be reflected in weekly export shipments (in the USDA's Export Sales report) in two weeks. We continue to project crop-year exports at a record 8.050 million tons.
Domestic soybean meal usage also should reach a record level this season as a result of higher animal numbers. Hog numbers as of September 1 were up about 4%; farrowing intentions for December 1997-February 1998 are up 8% versus last year's figure. The USDA has estimated 1998 broiler production will increase 7% from 1997 levels and turkey production will be up 5%. Egg output is projected to increase 2%. The weekly hatchery report showed both eggs set and chicks placed up 6%, which is higher than the 2%-4% increases that have been common in recent weeks.
However, the outlook for larger production of pork and poultry has reduced prices. Hog prices (barrows and gilts at Omaha, all weights) declined during September to $49.80 per cwt. versus $54.45 in August and $55.35 in September 1996. The wholesale composite broiler price dropped in September to 59.28 cents per pound from 64.63 cents in August and 69.53 cents in September 1996. Meanwhile, feed costs have increased versus August, although the lower corn price this year versus 1996 has held costs below last year's level. Profitability for both hogs and broilers declined. This situation bears watching as reduced profitability could adversely affect the long-term outlook for soybean meal feed usage.
The fall low in December soybean meal appears to have been established at $196.20 on September 30. The rally to $239.50 probably set an interim high. We look for a near-term price setback to as low as $215 in December meal ($210 in March meal). However, the excellent usage outlook and the need to maintain a record crush to cover that usage should result in a soybean meal price advance from November into the January-March quarter. We have been looking for a winter high of $240 to $245 basis the nearby contract (probably March meal) at that time, with an outside chance of hitting $280. Because March meal already has rallied to $234 as an interim high. it may be necessary to adjust our projection of the winter high closer to $280 per ton.
SOYBEAN OIL–Soybean oil prices continued their orderly advance last week despite a Commitments of Traders report showing funds heavily net long, thus making prices vulnerable to a sell-off on any loss of technical momentum. There was much media attention given to the El Nino again last week because of the following events: (1) the Climate Prediction Center issued an advisory projecting that the current episode would last into the March-May period of 1998; and (2) a conference in California that focused on the El Nino. Sea surface temperatures off the west coast of South America were 4.4 degrees Celsius above normal during the first half of October, the widest positive anomaly on record.
The drought continues in Southeast Asia, with consequences for lower palm oil and coconut oil production. The situation bears watching because coconut oil, palm oil and palm kernel oil combined account for more than 50% of the world vegetable oil trade. Palm oil exports from Malaysia alone in the crop year ended in September appear to have been about 189% of combined soybean oil exports from the United States, Brazil and Argentina in the same period.
Malaysia's Palm Oil Registration and Licensing Authority (PORLA) reported Malaysian palm oil production in September at 932,000 tonnes, which was a new record monthly level; ending stocks were in line with expectations at 878,000 tonnes, down slightly from the prior year's figure of 894,000. We expect 1997/98 production to decline to 8.54 MMT from the record 8.99 MMT in the year just ended (8.62 in 1995/96), We expect Malaysian palm oil exports to decline to 7.14 MMT in 1997/98 from 7.84 MMT in 1996/97 (6.84 MMT in 1995/96).
Figure 6 shows our estimate of monthly Malaysian palm oil production based on the average month-to-month production change in the four most recent years when an El Nino was extant the prior spring. (We double-weighted 1982/83, the only prior year with an El Nino of similar severity to the current one.) Although forecasting month-to-month production changes can result in individual monthly projections that are wrong, the errors tend to balance out, and this system can be a fairly good way of determining the seasonal pattern, although not necessarily the level. Our projections show a decline in monthly production into February (as was the case last season), with output remaining below last year's level until August 1998. The recovery indicated is steeper than that of 1982/83, so our projections for the end of the 1997/98 season may be too high.
We expect Malaysian palm oil stocks to decline to critically low levels just above 400,000 tonnes in the spring of 1998. The last time stocks were that low was June 1992, when end-month stocks of 398,000 tonnes were 69% of that month's use. The nadir we project in stocks this year would be 65% of monthly use. We expect a decline in 1997/98 domestic usage to decline to 1.34 MMT from 1.54 in 1996/97 (1.19 MMT in 1995/96). Exports appears likely to stay high early in the season (while supplies permit), reflecting increased exports to China, which has lower import duties on palm oil (12%) than on soybean oil (20%). The outlook for a drawdown in palm oil stocks and an increase in price could hold exports below the 1996/97 levels late in the season even if monthly palm oil production increases seasonally. As a result, ending stocks could recover.
Palm oil price changes tend to move inversely with stocks changes, although extremes in price sometimes follow peaks and troughs in stocks levels, Increasing palm oil prices should enhance the competitiveness of soybean oil prices, thus increasing exports, which subsequently would boost soybean oil prices. We are projecting 1997/98 U.S. soybean oil exports at 2,300 million pounds, 100 million less than the current USDA forecast, but still greater than the level seen in the year just ended, which appear to have been near 2,050 million pounds. We expect South American soybean oil to capture a large share of the decline in palm oil exports over the second half of the U.S. crop year.
Another factor that could impact on soybean oil prices in the long run is meal demand. With prospects for a record South American soybean crop next spring, it appears likely that U.S. exports of soybean meal could drop sharply in the last half of the crop year from the level seen during the first half of the year. Also, with feeding profitability declining, there could be a cutback or slowing in the expansion in pig numbers and in broiler production that would have an adverse impact on the level of soybean meal consumption. If so, the resulting decline in soybean crush would reduce soybean oil production, a potentially bullish factor.
The NOPA reported member-owned soybean oil stocks end-September at 1,191 million pounds, down 195 million from the August figure. Taken at face value, the stocks figure would imply an old-crop ending soybean oil stocks figure of 1,460 to 1,500 million pounds, below the USDA's estimate of 1.550 million. However, the stocks figure may be misleading because there is an unusually large quantity of soybean oil in rail tank cars this year. Rail car shortages have forced processors to fill all the cars they can get and have forced buyers to double-book to cover their needs in the event of possible transportation delays. If the oil in tank cars is not reported by the purchasers in the Census Bureau's stocks report, then it will show up as exceptionally large apparent domestic usage, Thus, the oil would constitute an addition to “invisible stocks,” or pipeline supplies. In this event, it could result in an apparent reduction in domestic soybean oil usage down the road as these invisible stocks are depleted. As it is, we expect only a modest increase in domestic consumption in 1997/98 following the 6% increase now indicated for 1996/97.
December soybean oil prices rallied into the range of 25.00-26.00 cents per pound last week. Soybean oil recovered some of the share of the joint product value that it lost on the meal price rally to October 13, when the December oil share reached a new contract low. Although December oil prices continue to march higher from their August low of 21.72 cents, we expect the rally to run out of steam at 26.00 cents. Support in the December contract is at the prior low of 23.57 cents, but that level could be penetrated if fund long liquidation is triggered. However, we think the market has seen a cyclical low on the nearest futures chart at 21.25 cents in August. We are long- term bullish on soybean oil, expecting a two-year bull market, and can make a projection for prices to rally to 40 cents over that time, We expect good commercial buying on breaks, but if weekly crush increases as we expect, there could be a period of price weakness in soybean oil during the October-December quarter.
Anne Frick
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