wmeubank@ocp.kcmo.com
LINNCO FUTURES GROUP
233 S. Wacker Dr., Ste. 2400, Chicago, Illinois
(October 24, 1997) SOYBEANS: The soy complex has experienced one of the most dynamic bull moves in several years, in just 8 trading sessions we have seen beans move $1.00, meal $40 (contract highs), and oil 1 cent. The reasoning behind the bull run has been heavy export business, the Crop report, and technical buying. The question that must be asked is the market ahead of itself?
USDA Supply/Demand For Soybeans
(Released October 10th)
1997/1998
(Mil. Acres) September October Planted 70.9 70.9 Harvested 69.8 69.8 Yield 39.3 39.0 (Mln. Bushels) Beginning Stocks 115 132 Production 2746 2722 Imports 5 5 Total Supply 2866 2859 Crushings 1495 1495 Exports 950 960 Seed 74 75 Residual 61 58 Total Use 2580 2589 Ending Stocks 285 270 Stocks/Use 11.1% 10.4%
PRODUCTION–The USDA surprised the trade by lowering production by 24 million bushels to 2.722 billion bushels. Early harvest results had given all indications that the USDA estimate would be raised, and quite possibly reach the 2.8 billion bushel level. The short fall in estimated production came from lower yields in Nebraska and Minnesota, and unchanged estimates in Illinois, Indiana, and Ohio. The reduction in the Southeast was expected with the drought conditions this summer. There is no real trend for changes in the November report when there has been a reduction in the October report. There have been 7 years since 1980 that fits reduced October estimates and 3 years we have seen increases in November, 3 years that decreased, and 1 year was left unchanged. I feel there is a good possibility we will see an increase in the November report as yield reports have been above USDA state estimates as harvest has progressed.
DEMAND–The only change the USDA made on the demand side comes in the export projection, which was raised to another record of 960 million (up 10 million from September). The reason for the change comes from the record weekly export sales pace at 417 million, which is already 44% of the estimated total. The week ending September 25th saw weekly sales of soybeans just shy of a weekly record set in November 1987 by only 2½ million bushels at 51.8 million. The export projections seem to be justified at this time, but don't be surprised if totals don't reach this lofty estimate due to slow Asian economies, increased wheat feeding will lower meal demand, and export competition from South America . The crush is also estimated to be at record levels and will tax the crushing capacity for the first 6 months of the year. The crush margins have faltered since the original estimate and may also slow the yearly crush, unless margin return to the lofty levels. The projected ending stocks of 270 million is considered a bullish estimate, and only a drop below 200 million will raise prices above $7.25.
WORLD–The world supply and demand estimate saw only minor changes from the September report, and the changes all came from the United States statistics. There is a question regarding the world estimates, specifically with South American production. The estimated planting in both Argentina and Brazil will be record large and will show increases between 10 and 15%. The recent $1.00 rally in futures will guarantee acreage, if not more, as we have seen large new-crop selling by the South America farmer. A respected private crop forecaster, Safras, has recently placed his crop estimate for Brazil at 29.8 mmt or 135 million bushels above the USDA estimate. There is also reason to believe that the Argentine crop will be raised if the Brazilian crop is correct. It is still very early to make such projections as planting has not started yet (November/January window), but El Nino years are very positive towards soybeans yields (see last month Growing Trends). The world demand is also suspect with the recent economic slowdown in Asia. The Chinese demand is much harder to define as economic problems are possible (see corn) and they have become a big speculator in the cash markets. Recently we have seen China sell back as much as 400,000 mmt of U.S. beans and 200,000 mmt of meal at profitable levels. China also sold back Brazilian meal at a loss last month, with this trading it's difficult to identify what their actual demand will be.
PRICE PROJECTIONS–The current price rally has exceeded what I consider economic value when reviewing the current fundamentals. There is plenty of euphoria about demand, but unlike last year when each week had demand exceeds projections, this year we may see the demand fall short of the record projected demand. The market is very overbought and a price retracement to the $6.75 to $6.60 should be expected. If the market is above $7.00, when you receive this letter, selling January $7.00 or $7.25 calls will be a very profitable trade. For producers who have cash inventory, look to sell cash and replace with options (if bullish), as the world trade will move to South America by late winter. Once the market moves lower we will most likely trade in a defined range until more is known about the South American crop. The large demand base will keep prices from falling below $6.50.
Doug Price
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