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(September 29, 1997) SOYBEANS: Harvest has begun and the market is focused more on the pace of movement than on the size of the crop. With extremely tight old-crop supplies and prospects for record crush and exports during October-December, the soybean price structure will need to encourage the rapid movement of earlier harvested soybeans to market. We anticipate this may be accomplished with historically strong basis levels for the date as well as board carrying charges that are less than the cost of carry.
Another incentive for producers to market at least a portion of their crop quickly this year is the expectation for record South American soybean plantings and record production next spring. This leaves a narrow window of about six months for a demand-led bull market in U.S. soybeans. However, farmers have ample storage available this year and are in an improved financial position after two years of good prices and market transition payments from the government; these factors might lead to producer holding. If farmers hold tight to their soybeans, seasonal harvest price pressure might be mitigated.
The USDA will report September 1 Stocks in All Positions (old-crop carryover) on Tuesday, September 30. The 1996 soybean crop production figure will be subject to revision at that time. Stocks reports during the 1996/97 season indicated that beginning supplies were overstated, leading many to conclude that the 1996 crop size will be adjusted downward from the current level of 2,382 million bushels. If so, it could lead to ideas that this year's yield should be scaled back from current levels, but this may be a psychological, rather than real, market factor. Also, the September 1, 1996 stocks figure of 183 million bushels has always looked overstated, and may be revised downward instead of the crop size. We do not expect the stocks report to have much market impact if it is bullish–it is well known that stocks are at bare minimum levels; however, a bearish figure would augment record new-crop production and could pressure prices.
Soybeans were reported 3% harvested nationwide as of September 21, but we still expect harvest to be about 20% complete as of October 1. There has been frost and light freeze in much of the northern half of the Corn Belt, but no detrimental effects are expected for soybean yields. However, the oil content of the soybeans may have been reduced by the unseasonably cool weather during pod filling. Reports from the field indicate that in most areas where harvesting is underway, yields are good and often better than expected.
We expect the USDA to increase its estimate of the soybean crop in its October 10 Crop Production report. We are still forecasting a final crop size of 2,793 million bushels, based on a final yield of 40.0 bushels per acre, up from 39.3 bushels per acre indicated in September. Importantly, the direction of the crop size change from September to October usually indicates the direction from October to the January final. In 18 of 24 years when the October crop estimate was above the September figure, the final crop size was above the October figure. In 14 of 22 years when the October estimate was below the September estimate, the final crop size was below that indicated in October. Hence, if the USDA's October yield estimate exceeds 40.0 bushels per acre, we may increase our projection of the final crop size.
Crush during the last two weeks has exceeded the comparable, level of the prior two years. Weekly crush expanded sharply during the first week of October in each of the last two years. We expect weekly soybean crush figures reported by the National Oilseed Processors Association (NOPA) to average 32.0 million bushels per week during the October-December quarter, which is above the prior weekly record of 31.9 million bushels. Weekly exports in the last two seasons staged a sharp increase in mid-October. We are projecting average weekly exports during the October-December quarter at 28.7 million bushels, just above last year's comparable average of 28.2 million.
For the crop year as a whole, soybean supplies look likely to be adequate to meet prospective usage. Because old-crop carryover appears to represent a bare-bones minimum, it is not reasonable to expect a decline in carryover during the 1997/98 season. Hence. one bullish fundamental factor will be eliminated from this season's outlook. The other factor normally associated with a bullish fundamental situation in soybeans is a large early season usage pace relative to supplies. That factor does appear extant this year, as October-December usage as a percent of October 1 supplies likely will be the third highest on record (after last year and 1953).
The decline in South American soybean supplies opens the door for extremely large U.S. soybean usage, but also for record soybean imports by both Argentina and Brazil. Brazil's ban on Roundup Ready soybeans is expected to be lifted the first week of October on soybeans for crush; Argentina was thought to have added to soybean purchases from the United States last week. Although high transportation costs normally make U.S. soybeans prohibitively expensive in Argentina, a shortfall of South American supplies has caused Argentina to turn to the United States for beans for the first time.
Both Brazil and Argentina are expected to increase area planted to soybeans this fall. Private estimates of Brazil's 1998 soybean crop have edged up to 29-30 million metric tons (MMT) from last year's record of 26.5 MMT and the USDA's current estimate of 28.0 MMT. Argentine production is currently expected to reach 14.0-15.0 MMT; the USDA's forecast is 14.2 MMT, a new record.
November soybeans reached an early July low of $5.77 per bushel that was tested at $6.02 on August 18; the latter level is a possible candidate for a harvest low. However, price history in fundamentally similar years suggests that harvest hedge pressure and movement is likely to weigh on prices during October. We still look for a low in the $5.61 area in late October, but would reassess our forecast on penetration of the recent high of $6.53. We are forecasting extremely large usage this season and recognize the need for supplies to move to market quickly. We expect a post-harvest rally to reach the $7.20 level during the January-March quarter; a minimum level for this high is $6.50 while there is an outside possibility of $8.00. However, the need to move supplies to market quickly this year could set up the possibility that farmers will store soybeans in hopes of higher prices. The risk to our forecast is that strong farmer holding could force prices to a higher level during harvest. Such a strategy on the part of farmers, however, could backfire and set up a bear market not only by providing further encouragement to South American farmers to plant more soybeans but also by ultimately reducing usage during the widest window of opportunity for the United States this season.
SOYBEAN MEAL–Soybean meal futures prices have been declining for three weeks. Domestic cash basis levels have also been falling as crushers obtain beans, thus permitting weekly crush to increase. The market structure in soybean meal remains inverted and crush margins remain attractive, a combination that should encourage a continued expansion in soybean crush as long as farmer movement is large enough to accommodate soybean usage requirements. We expect harvest hedge pressure during October to be the dominant near-term factor in soybean meal. During the first half of the crop year, the key factor in the soybean meal market should be the outlook for record usage, particularly exports.
We expect Brazil to lift the ban on imports of transgenic soybeans when the Commission for Biological Security meets on October 2. This should allow Brazil to import a record quantity of soybeans from the United States to augment supplies for crush. Even so, exportable soybean meal supplies from Brazil in the October-March semester are likely to drop 1.5 MMT below last year's level. We are projecting a slight increase of 0.14 MMT tonnes in soybean meal exports from Argentina during the same period and a decline of 0.5 MMT in total exports from the United States, Argentina and Brazil combined during October-March. This estimate would require an increase of 0.8 MMT in U.S. exports during the first half of the 1997/98 season to a record 5.4 million tons.
The better-than- expected soybean crop in India could reduce the pressure for our projected increase in U.S. meal exports. Because of timely (although below normal) monsoon rains, and an increase in planted area, Indian soybean production now looks likely to fall within a range of 4.7 to 4.9 MMT, up from about 4.0 MMT last year. As a result, that country's soybean meal exports could increase to about 2.8 MMT, up from all estimated 2.3 MMT last year.
The Chinese soybean crop is unlikely to exceed last year's production level because of drought. Although China's soybean imports should increase (to help utilize expanded crush capacity), it appears likely that China's rapidly growing feeding industry will require a sizeable increase in soybean meal imports. Oil World has estimated Chinese soybean meal imports in the 1997/98 season at 5.9 MMT versus 3.75 MMT last season; the USDA's comparable figures are 3.75 MMT and 2.9 MMT, respectively. Although the base levels vary considerably, both sources indicate a large increase in soybean meal imports this season. There was concern that China might increase its import duty on soybean meal, but the tariff list effective October 1 retains the import duty at 5%.
We are looking for October-December meal exports to reach 2.5 million tons, up from 1.884 million tons last year. For the 1997/98 crop year, we continue to look for exports at a record 8.05 million tons. Total export commitments as of September 18 (two weeks before the season's start) already were 2.1 million tons. The Export Sales report also indicated a good shipment figure of 102,300 tonnes for the week ended September 18, the highest weekly figure in 14 weeks. The NOPA Crush report indicated shipments of meal from members' plants for export at 102,100 tonnes the week ended September 24; this was the highest figure in 17 weeks. Hence, it appears that the meal export pace is beginning to pick up. The key question for soybean meal prices is whether soybean crush, and hence meal production, will increase commensurately with the strong, early export pace. Domestic usage also is contributing to a positive outlook. The USDA's September Hogs and Pigs report showed an increase in hog inventories from last year. Broiler numbers also are expanding, with eggs set and chicks placed running generally 2% to 4% above the prior year's level, although last week's report showed a 6% increase in eggs set. Feeding margins still appear profitable, but have been hurt by weaker hog and broiler prices as well as higher corn prices. We are projecting October-December domestic soybean meal usage at 7.700 million tons, which would exceed last year's record of 7.482 million tons over the same quarter. Part of the increase should reflect a rebuilding in pipeline stocks, particularly as soybean meal moves into export channels.
December soybean meal has a double high in place at $222 per ton that we do not expect to be penetrated prior to establishment of a fall low. We expect harvest movement of soybeans and the seasonal increase in crush to pressure soybean prices during October, and we look for additional downward price pressure in the likely event that the USDA increases its projection of the 1997 soybean crop on October 10. We are projecting a late-October low of $180 to $185 in December meal as the market focuses on the pace of harvest movement and the size of supplies. However, the record soybean meal usage we expect during the October-March period should begin to capture the market's attention by early November, at which point we would look for soybean meal prices to begin rallying to a winter high in the January-March quarter. Our target for the winter high is the $240-$245 range basis the nearby contract, probably March. We look for the high to be at least $220, with an outside chance that it could reach $280.
SOYBEAN OIL–Soybean oil prices rallied to a new high for the move last week as the December contract filled the gap left in July between 24.40 cents per pound and 24.52. The two main bullish influences were the Midwest's below-normal temperatures (which should lead to subnormal soybean oil yields) and higher palm oil prices.
Palm oil prices continued to rally last week on good export offtake and concerns about future production prospects as a result of the El Nino. Smog continues to plague Southeast Asia from forest fires in Indonesia and Eastern Malaysia. The drought associated with the El Nino has spread the fires thought to have been set by farmers and plantation owners in slash-and-burn land-clearing techniques. There are concerns that the smog may cause some palm oil processing plant shutdowns in an attempt to reduce the emission of pollutants. There are also concerns that the haze, which is reducing visibility, may be detrimental to the palm trees. The drought is expected to reduce palm oil production in 1998. In the meantime, Malaysian palm oil production is increasing to a seasonal peak, which is usually reached in September and October. Stocks are expected to rise to just under 900,000 tonnes at the end of September, very near the year-earlier level of 894,000 tonnes. However. as a percent of usage, stocks are likely to be a bit lower.
Palm stearin prices rose last week due to a ban imposed by the European Union on imports of tallow not meeting stringent production requirements as well as a threat to extend the ban to include imports of products containing tallow, such as cosmetics. The move is in response to concerns in the European Union about BSE (“mad cow” disease).
Some of the impetus for increasing palm oil futures prices has been the weakness in the Malaysian Ringgit relative to the U.S. Dollar; palm oil trades in ringgits on the Kuala Lumpur Commodity Exchange, but in dollars in the world market. Although palm oil prices have firmed, soybean oil prices also have rallied; although soybean oil is still not competitive with palm oil, it is moving in that direction. The long-term outlook for higher palm oil prices, as a result of drought-reduced production in 1998, is a constructive factor for soybean oil exports. We are forecasting old-crop soybean oil exports at 2,050 million pounds (more than double the prior season's level of 991 million) and new-crop exports at 2,300 million.
The Census Bureau reported end-August soybean oil stocks at 1,705 million pounds, confirming the sharp drop in stocks indicated by the NOPA. Assuming that soybean oil exports during August were 250 million pounds (as indicated by weekly figures), domestic usage during the month declined slightly to 1,164 million pounds from 1,192 million the prior month and 1.210 million in August 1996. However, domestic usage for the crop year as a whole still looks likely to increase 5%. We are projecting an increase of 200 million pounds in 1997/98 domestic consumption, which is lower than the annual linear trendline increase of 300 million pounds. Larger supplies of competing fats and oils and higher soybean off prices are likely to limit this year's expansion. In addition, it is common for usage to plateau for two seasons following a season in which soybean oil consumption has increased sharply, as was the case in 1996/97.
We still expect meal consumption to control the crush during the first half of the crop year. Because soybean oil yields are likely to be below normal at 11.0 pounds per bushel (or less), the soybean oil produced as a byproduct of crush for meal is likely to be much more closely in balance with oil consumption than it would be with normal oil yields. Hence, we look for a modest increase in soybean oil stocks during the October-December quarter to 1,930 million pounds, just under the year-earlier level of 2,027 million. We are forecasting new-crop ending stocks at 1,785 million pounds versus projected old-crop stocks of 1,620 million pounds.
December soybean oil prices have rallied from an August low of 21.72 cents to 24.48 last week. The first support below the market is in the 23.30-cent area. The oil share of the joint product value, basis the December contracts, found support the last five months at 34.5% and resistance at 37.2%: it is currently close to the top of this range. As soybeans move into crushers' hands, we expect soybean oil prices to retest the 22.00-cent level. Once harvest pressure on soybeans and meal abates, we expect the soybean oil share of the joint product value to decline. We are looking for rallies in soybean oil to be capped in the 26.00-cent area this winter. The spring of 1998 should mark a turning point in the oil/meal price relationship and the beginning of a long-term bull market in soybean oil.
Anne Frick
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