PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 27, 1997) SOYBEANS: The outlook for large soybean usage was clouded last week after the sharp drop in the Hang Seng Index raised the level of concern about the potentially negative impact that currency and economic crises in some Southeast Asian countries would have on their soybean import demand. Currencies in Thailand, Indonesia, Malaysia and the Philippines have declined between 33% and 50% since July, making imported commodities much more expensive. Growing imports of meal and soybeans by Asian countries to support a rapidly expanding feeding economy have been fueled by economic growth. With that growth now threatened, it raises questions about the future of the feed industry and in turn, demand for imported feedstuffs. The economy of South Korea, another large soybean and meal importer, also is witnessing a sharp slowdown in its long-term growth rate. So far, there is no statistical evidence that soybean meal or soybean exports will decline this season; thus, the market appears to be taking a “wait and see” attitude toward the situation.
Soybean usage reported last week totaled 72.6 million bushels as both crush and exports attained record levels. These figures refocused attention on the outlook for large usage this year and an extremely high usage/supply ratio, despite a record crop. Figure 1 shows the acceleration in weekly usage; the “bullish” usage level is the weekly average of combined crush and exports needed to exceed 27,5% of calculated October 1 supplies. Figure 2 shows that (1) our estimate of October-December usage at 30% of October 1 supplies is exceptionally high historically, although below last year's level and (2) in prior years when the October/December usage/supply ratio exceeded 27.5%, July soybeans had a tendency to reach $8.00 per bushel or higher at some point in the February-July period. This season, we would expect a high near the beginning of that period unless there is a drought next summer.
The early season U.S. usage outlook is enhanced this year by reduced soybean supplies in South America. There was talk last week that Brazil was canceling prior purchases of U.S. soybeans, but this was probably a function of profit-taking rather than an indication of a drop in import requirements. Ironically, Brazil's Commission for Biological Security announced that unlimited quantities of Roundup Ready soybeans could be imported.
New-crop planting has begun in Brazil, and the dry central and northern soybean areas have received beneficial rainfall over the last two weeks. However, Rio Grande do Sul remains very wet, which has delayed planting. The Brazilian Agricultural Ministry forecast production would increase 13% to 16% from last year's level of 26.16 million metric tons (MMT), bringing the crop to around 30 MMT, Usually, Brazilian soybean yields are good in years with an El Nino. Argentine planting has not yet begun, but area is expected to increase, and if yields recover from last year's drought-reduced levels, the crop should reach a new record above 14 MMT. Analysts with the Argentine Agricultural Ministry project the Argentine crop at 15 MMT. Bolivia and Paraguay are expected to add another 4.0 to 4.5 MMT, bringing total South American production to 49-49.5 MMT versus 41.6 MMT last year. If the South American crop is as large as expected, it should pressure soybean and meal prices in the spring. However, in the meantime, the fact that a record crop is needed may keep a weather premium built into soybean prices until good yields are assured, which would be in the January-March quarter.
The El Nino continues to get very heavy press coverage and is a constant background factor. There has been some moderation in the Southern Oscillation Index (SOI) recently. The SOI reached its widest extreme at —2.3 in May and June, moderated to —1.0 in July and then widened again to —1.9 in August. In September, it was —1.3 and so far in October is —1.2. The narrowing in the SOI is leading some to question the strength of the current El Nino, particularly because some of the weather patterns normally associated with an El Nino have not been seen this year. However, keep in mind that sea surface temperatures are the defining characteristic of an El Nino, not the SOI, which tends to be more volatile. Although the sea surface temperature anomalies are as wide or wider this year than in 1982/83 (when the most severe El Nino in recent history occurred), the SOI is not as extreme. According to our meteorologists, that is because the areas of the widest surface air pressure anomalies (that the SOI measures) were near the equator in 1982/83, so the readings at Tahiti and Darwin (the two locations where the SOI is calculated) picked up those anomalies. This year, the area of widest pressure anomalies is about 40 degrees south latitude so that the reading based on Tahiti and Darwin surface pressures is not measuring the anomalies at their widest, and hence the SOI is not as extreme this year as in 1982/83. That does not make the sea surface temperatures any cooler, however, and, hence, does not make the El Nino any less strong.
Although there are ideas that an El Nino can lead to a drought in the United States the following summer, scientists say there is no relationship between El Nino events and U.S. Midwest weather. Now that the Climate Prediction Center has forecast an end to this El Nino in the spring of 1998, there is talk that in years when an El Nino ends in the spring there is a drought in the U.S. Midwest. Again, history would disprove this claim. It is true that an El Nino ended in December 1987, a La Nina developed going into the summer of 1988 and that the United States had a drought that summer. However, the other commonly cited year, 1983, did not see an end to the El Nino until September. El Ninos ended prior to the growing seasons in 1958, 1966, 1970, 1977, 1992 and 1995 and none of these years saw a drought in the U.S. Midwest.
We can't say that there won't be a drought next summer, but if there is, it might be associated with factors other than the El Nino. However, because many traders think there is a relationship, the market may respond as if there is and prices will have some premium built in for the heightened uncertainty. After all, the futures market is anticipatory by nature. More importantly, the world situation is such that a U.S. drought could have a major impact on prices. Usage levels for U.S. soybeans and corn are expected to be record high this season while world and U.S. grain and oilseed stocks are low relative to usage. Hence, the world is dependent on a continued stream of record crops. This factor may be the more valid reason for new-crop prices to be well-supported.
One relationship that bears watching is the November 1998 soybean/December 1998 corn ratio, which currently stands at 2.36:1. We expect acreage in the United States and in foreign countries to switch from soybeans and oilseeds to grains because of rotational considerations, and the current ratio should do nothing to stop that pattern. Given current expectations for a 1997/98 carryover figure that, while comfortable, contains no surplus, the outlook for reduced new-crop acreage may become a critical price-moving factor. However, there are three potentially negative fundamental factors on the horizon for the 1998/99 crop year: (1) a record South American crop in the spring of 1998 could provide a larger degree of competition for U,S. soybeans and products in the second half of the South American crop year (the first half of the U.S. crop year); (2) feeding ratios and animal numbers bear watching for their impact on soybean meal demand and 1998/99 soybean crush; and (3) the economic situation in Southeast Asia threatens to reduce the rate of growth in soybean and meal imports there.
Meanwhile, the 1997/98 crop year is still shaping up as a demand bull market for U.S. soybeans given the prospects for a high early season usage pace. We expect the soybean price pattern in the first half of the season to be characteristic of a minor bull market, i.e., a price peak in the January-March quarter. However, even in bull markets, when there is a tendency for prices to make an early harvest low (as was the case this year), prices exhibit a tendency to decline from their post- harvest high. The prior two minor bull years made setback lows in the October-November time period. While last week's low of $6.87 in November soybeans ($6.98½ in the March contract) is a candidate for the setback low, price patterns in similar years would suggest a deeper decline, to an average of $6.63 in November soybeans and $6.78 in March soybeans. We then look for prices to rally to a winter high in the $7.70 to $8.20 area. A price decline appears likely in the spring on harvest pressure from the South American soybean crop, but that could be offset by indications of a sharp reduction in acreage or low subsoil moisture in the United States.
SOYBEAN MEAL–Soybean meal prices consolidated last week, supported by strength in corn and soybeans, but held in check by concerns about demand prospects and weaker domestic basis levels as processors pushed weekly crush to record levels.
The record one-day decline in Hong Kong's Hang Seng Stock Index focused attention on the weakening currencies of several Southeast Asian nations, particularly the Thai Baht, which was floated on July 2 and has since lost 49% of its value against the dollar from its pre-float peg. The Philippine Peso lost 36% versus the dollar between July 9 and October 9. The Indonesian rupiah lost 58% from July 10 to October 6, but currently stands about 47% below the July 10 level. The Malaysian Ringgit declined 33% from July 7 to October 23. The more stable currencies in Taiwan and South Korea have declined 12% and 5%, respectively, since early July. These sharp declines make imported commodities more expensive, which cannot be positive for the outlook for U.S. exports to this region.
Table 2 shows projected imports of soybean complex commodities, according to the latest agricultural attache estimates in the four countries with the most severe currency declines in the Association of Southeast Asian Nations (ASEAN). The figures shown for 1997/98 are projections and are subject to change. Notice that these four countries take about 8% of U.S. soybean exports and 15% of U.S. meal exports and account for about 5% of world soybean exports and 9% of world meal exports. Hence, if their imports were to decline 10%-20%, it would reduce U.S. soybean exports by 1%-2% and U.S. soybean meal exports by 2%-3%. World trade in soybeans would be reduced by 1% or less and meal trade by just 1%-2%. A bigger influence would be seen if trade with Taiwan or Korea were affected, but other factors should have more influence there than currency differentials. Note also that imports of soybean oil by these countries are negligible. Hence, if import demand were reduced, it would impact soybeans and meal, but could be a supportive factor for soybean oil prices if lower meal demand reduced crush.
Export commitments as of October 16 were 69% above the year-earlier level, but weekly shipments have not yet shown the large increase indicated by export figures in the crush report from the National Oilseed Processors Association (NOPA). A weekly export figure of 126,200 tons in the crush report for the week ended October 8 was followed by an all-time record export figure of 328,000 tons in the report for October 15. The crush report for October 22 included an export figure of 118,000 tons. However, the highest weekly shipments figure to date from the more official Export Sales report is only 77,900 tonnes (85,900 tons). To reach our export projection for the October-December quarter of 2.500 million tons, weekly shipments reported in the Export Sales report need to average 180,000 tonnes over the rest of the quarter, assuming that hull meal accounts for 6.5% of total exports as they did last year. This would require an immediate and strong surge in exports. We are monitoring the export situation in meal carefully because it is the factor that we expect to push soybean crush not only to a record level but also to an unusually high level as a percent of usage.
Domestic use of soybean meal in the year just ended finished on a strong note with apparent consumption in the July-September quarter up 7.7% from the year- earlier level. For the 1996/97 crop year, however, domestic usage appeared to increase only 2-6%. Higher animal numbers should boost domestic meal consumption in 1997/98, but feeding profitability has been slipping due to high feed prices and lower hog and poultry prices.
December soybean meal has an interim high in place at $239.50 per ton. We are looking for prices to decline to the $215 level in December meal and $210 in March meal before finding good support. The excellent usage outlook and the resulting need to maintain a record crush should set the stage for a soybean meal price advance from November into the January-March quarter. We have been looking for a winter high of $240-$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. In the absence of a major change in fundamentals, we will wait until a prospective interim low is in place to modify that forecast.
SOYBEAN OIL–Soybean oil prices continued to work higher last week under the leadership of extremely tight supplies of rapeseed oil, sunflowerseed oil and soybean oil in Europe. Despite a record rapeseed crop this season and record rapeseed crushing in Europe from July through September, large exports to Eastern Europe, Russia and, to a lesser extent, China, have absorbed the rapeseed oil production. Because Eastern Europe and Russia have been seeking refined and bottled oil, European refining capacity is being strained. in addition, EU imports of sunflowerseed from Russia and the Ukraine are delayed this year, partially due to slow sales from farms. The result has been a reduction in European edible oil stocks. Quotes for sunflowerseed oil often are unavailable, but it appears to be trading at levels near rapeseed oil, with both oils at a wide premium to soybean oil. Palm oil is at the bottom of the ladder, despite indications of production problems in 1998.
The widening discount in palm oil prices is occurring not just in Europe but also in f.o.b. quotes for Malaysian RBD palm oil as compared to f.o.b. quotes for U.S. and South American soybean oil. Although the weakening Asian currencies may be having some effect, the real impact on palm oil prices is probably due to a seasonal rise in stocks while soybean oil stocks are declining. The seasonal peak in Malaysian palm oil production is expected to occur in September or October, and stocks should begin declining in November, reaching their lowest point of the crop year in the spring of 1998 near 400,000 tonnes. As of the end of September, combined stocks of palm oil in Malaysia and soybean oil in South America and the United States were below the comparable year-earlier level, but not unusually low historically. However, the U.S. share of the total was low.
U.S. soybean oil stocks declined 617 million pounds, or 29%, during the final quarter of the 1996/97 season as both exports and domestic usage were unusually high. For the crop year just ended, domestic usage appears to have increased about 6%, although the final total will not be available until September exports are reported. Some of the apparent usage probably was accounted for by an increase in pipeline supplies, or “invisible stocks,” due to transportation problems that resulted in “double buying” of oil and an unusually large share of supplies in transit. The preliminary old-crop ending stocks figure of 1,521 million pounds is down from 2,015 million pounds in 1995/96.
As weekly crush levels increase, soybean oil stocks should slowly build, but much will depend on soybean oil yields. We are projecting a slight increase in oil yields to 10.95 pounds per bushel in 1997/98 from the unusually low level of 10.90 pounds in 1996/97. However, anecdotal evidence suggests that this year's oil yields could be higher, in the 11.1- to 11.2-pound-per-bushel range, just shy of a normal yield of 11.25 pounds. Each 0.1 pound per bushel change in yield equals 150 million pounds of soybean oil, so yield is important to the annual soybean oil balance. However, since early season oil yields tend to be lower than the crop-year average, the effect will be less pronounced in the first quarter of the crop year.
Because soybean oil supplies are dependent on soybean meal demand, which determines the level of crush, weakness in the Asian currencies and the resulting concerns about Asian import demand for soybean meal is a constructive background factor for soybean oil. We continue to view declining feed margins in the United States as a factor that could hurt soybean meal demand later in the crop year; in the near term, a sharp increase in hog and broiler numbers should boost feed consumption of soybean meal. We have been looking for a record U.S. soybean crush during the October-December period, but if meal export demand falters, it could mean that oil stocks remain fairly low through year end, preventing the price decline we expect during the quarter.
Soybean oil prices appear to have set a cyclical futures low at 21.25 cents per pound in August. Prices have moved upward in channel since then, with the December contract rallying from its contract low in August of 21.72 cents to last week's high of 25.78 cents; in the process the only downward correction was a 1.2-cent decline (5%) from August 22 to September 8. Managed futures funds have established very large net long positions, which is a potentially bearish factor if prices provide a technical signal that an interim high may be in place. At this point, it would take penetration of the 24.50-cent level to provide a price- based signal of impending weakness. There is support between 23.30 and 23.60 cents in December oil, but fund long liquidation (should it be triggered) could push prices through that area. On the high side, the 26.10-cent level is the next resistance, followed by the spring high in December oil of 27.50, We are very bullish on soybean oil in the long term and look for a bull market extending well into the 1998/99 crop year, Price patterns in prior major bull markets would suggest that the 40.00-cent level is a conservative objective for an ultimate high. However, the current advance appears overextended, making the market vulnerable to a setback into or during November.
Anne Frick
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