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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 6, 1997) SOYBEANS: Old-crop carryover stocks as of September 1 were reported last week at 132 million bushels, 15-20 million above average expectations. As a result, the 1996 soybean crop's size, which some thought overstated, was left unchanged at 2,382 million. Although the lack of August trade data makes the 1996/97 balance sheet projections provisional, it appears that the final residual figure was about 52 million bushels, which does not look out of line with recent years if one assumes that the residual increases with crop size. The carryover-to-usage ratio appears to have been 5.4%.
On Friday, October 10, the USDA will issue its October Crop report as well as an accompanying Supply/Demand report. The September 1 (beginning) stocks figure will add 17 million bushels to total 1997 supplies. In addition, reports from the field indicate that yields are better than expected in most areas, indicating the likelihood that the October crop estimate will exceed the September figure of 2,746 million bushels, however, based on condition ratings, we are projecting only a slight increase to 2,795 million bushels. The direction of the crop size change from September to October usually is a preview of 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 our current projection of final yield at 40.0 bushels per acre, we may need to increase our estimate of the final crop size.
Our forecasts for 1997/98 soybean usage are 1,517 million bushels for crush and 978 million for export. With a crop near 2,800 million bushels, these disappearance estimates would leave a carryover of 315 million bushels, which is above the USDA's September estimate of 285 million. We expect the USDA to boost its projected soybean carryover in its October 10 report.
The pace of new-crop movement remains a concern to the soybean market. Harvest weather last week was perfect, which should have allowed fast harvest progress. The USDA uses the average of the last five years as its “average” progress figure, thus this year's calculation of the average drops the extremely quick harvest pace of 1991 and substitutes the slow pace of 1996. In our calculation of this year's average and progress to date, we expect the harvest to reach the halfway mark between October 10 and 15. There appears to be a widespread assumption that the fall price low occurs near the 50% mark in harvest, but history contradicts this theory. Instead, it is soybean movement that is important. If the crop size estimate rises in the October report, as expected, it could raise concerns about the potential for increases in subsequent reports, encouraging additional farmer selling; farmers have ample storage space this year and, hence, have the option to store beans.
The early season usage pace still looks likely to be extremely large as South American supplies wane. Diminishing supplies as of September 1 caused usage to slip below the comparable year-earlier level. However, that should help boost usage during the early part of the 1997 crop season. The Brazilian Commission for Biological Security (CTNB) met last week and discussed its import ban on transgenic soybeans. The commission remains undecided on whether to lift the requirement that imports be certified free of transgenic soybeans; it will meet again on October 8.
Export sales continue to expand sharply; the net increase reported for the week ended September 26 was 1,408 million metric tons (MMT), the second highest weekly increase on record. Total bookings now stand at 385 million bushels, or 39% of our crop-year, export estimate. Weekly crush also is increasing, with the National Oilseed Processors Association (NOPA) crush for the week ended October 1 at 27.5 million bushels versus 23.5 million bushels last year. Crushers are eager to take advantage of the extremely profitable early season crush margins if they can obtain adequate soybean supplies.
We define the harvest low as the low reached by November soybeans between August 1 and expiration. To date, that low is $6.02 per bushel, established August 18. Although August is the most common month for a harvest low, early harvest lows are normally associated with some bullish fundamental factor such as the outlook for new- crop production to fall short of usage (resulting in a reduction in carryover stocks) or a very high early season usage-to-supply pace. We expect a bullish early season usage pace this year. However, it is possible that the harvest low will not occur until late October. If the USDA increases the crop size in its October report, then history shows that the harvest low in November soybeans after the report occurred in 10 of 24 years (42%) in which the October estimate increased versus 14 of 46 (30%) in all years. While such odds would still favor a low prior to the October Crop report, there are two other factors we are considering:
1. In years when carryover has increased after two consecutive declines, the harvest low was made in October.
2. The prospective carryover-to-usage ratio above 11% has historically been linked to a harvest low under $6.00.
Once the weight of harvest pressure has passed, we expect the market to concentrate on the progress of new-crop South American soybean planting and on the high early season usage pace. We look for March soybeans to rally from November into January- March. Our target high is $7.20, however the high could be between $6.50 and $8.00.
SOYBEAN MEAL–The key fundamental factor in the new-crop soybean meal outlook remains the prospect of record exports, largely as a result of reduced Brazilian soybean supplies for crush and lower Brazilian soybean meal exports during the October-March period. Brazil's CTNB couldn't decide whether to lift its ban on the import of transgenic soybeans at a meeting last week, and scheduled another discussion for October 8. Brazilian soybean crush, and hence soybean meal export availability, is expected to decline even if the country imports the record 2.0 MMT of soybeans (including 1.2 MMT from the United States) that we believe is possible. However, the Brazilian ban on transgenic soybean imports effectively constitutes a ban on imports of U.S. soybeans–if it stands, then U.S. soybean meal exports, already expected to be a record, would need to increase even further. Also, it would force meal to garner a larger share of the joint product value in order to maintain profitable crush margins. Hence, the ban is constructive for soybean meal prices.
Total 1997/98 export commitments as of September 25 were 2.001 MMT, and an additional 131,400 tonnes in undelivered old-crop sales will likely be carried over into new crop in this Thursday's report. The total equates to 2.35 million tons, or 219% of our projected new-crop meal exports of 8.05 million tons. If the Brazilian soybean import bans sticks, our export estimate would need to be increased further.
Crush during September, the last month of the 1996/97 product crop year appears to have been 109 million bushels, up 8 million bushels from the prior year's level, despite lower September 1 soybean stocks. Total 1996/97 product-year crush appears to have been 1,444 million bushels, up 6% from 1995/96. We have raised our old-crop soybean meal export estimate 40,000 tons to 7.005 million tons.
Domestic usage of soybean meal seems to have staged an increase during the July-September quarter. Cumulative domestic usage for the first three quarters of the crop year was up only 1%. However, domestic usage in the final quarter of the crop year appear to have increased 6.6% from the comparable quarter a year earlier. Domestic usage is a derived figure after exports are subtracted from total consumption. Exports during the July-September quarter were down about 545,000 tons from the year-earlier level, and this contributed to the apparent increase. The weekly NOPA figures also indicate an increase in soybean crush for domestic consumption after the soybean equivalent of the reported meal exports is subtracted from the total weekly crush. We are projecting a seventh consecutive increase in domestic disappearance in 1996/97 to 27.16 million tons, up 2% from 1995/96.
New-crop domestic usage is likely to increase as a result of higher animal numbers. The September Hogs and Pigs report showed the hog inventory up 4% from the prior year's level. Broiler numbers are expanding as well, according to the weekly hatchery report, which consistently has shown eggs set and chicks placed running 2% to 4% above the year- earlier level. However, profitability merits close monitoring as the outlook for increased production has been reducing livestock and poultry prices.
December soybean meal prices have a double high at $222 per ton that is unlikely to be penetrated prior to establishment of a fall low. Even if Brazil lifts the ban on transgenic soybeans, we still think December soybean meal could decline to the $180 to $185 level. However, if the ban is maintained, then we would not expect December meal to penetrate the $195 level. We still look for prices to increase from November into the January-March quarter on the outlook for record usage. We are maintaining our forecast for a high this winter of $240-$245 in March meal. We look for a period of price weakness again in the spring as a record large South American soybean crop moves to market. However, prospects for U.S. soybean plantings and spring soil moisture profiles also will have an impact on soybean meal prices at that time.
SOYBEAN OIL–Soybean oil prices edged lower last week, although the underlying current of bullishness was evident in the grudging way in which prices gave ground as well as the market's apparent failure to trigger long liquidation and profit-taking by funds, which are heavily net long. Continued publicity given to the intensifying El Nino and the dense smog that blanketed Southeast Asia from brush and forest fires highlighted the outlook for production problems with palm and coconut oil in 1998. The effect of the smog on the palm and coconut oil trees is unknown, but appears to be less of a concern for production than the drought that is contributing to the spreading of fires. There was some rainfall noted in Indonesia last week, but it was neither seasonally heavy nor widespread.
The sea surface temperatures off the western coast of Peru warmed further during September to 4.0 degrees Celsius above normal, which is a wider positive anomaly than was reached during the 1982/83 El Nino. Scientists are still projecting that the current El Nino will last into early 1998. However, although this episode may be in the same league with the intense 1982/83 episode, the effects from it are not the same. There are some general similarities such as drought in Southeast Asia, but the areas of intense dryness are not carbon copies of those 15 years ago, According to Oil World, precipitation in palm oil producing areas of both Western and Eastern Malaysia has been below normal since December 1996, but months with below-normal rainfall have been interspersed with months in which rainfall was above normal. Indonesia has had more consistent and serious dryness than Malaysia, with precipitation less than 70% of normal each month since October 1996 (except April 1997). Average rainfall in Philippine coconut growing areas was below normal from April through June, but normal to above normal in July.
Malaysian palm oil futures prices (traded in ringgits) have advanced on the extreme weakness in the currency, while cash quotes (traded in dollars) have staged a much more modest advance. Palm olein prices, which were once trading at a wide premium to soybean oil, have declined to a discount. Given the prospects for a palm oil production decline in 1998, it is likely that palm oil prices will again trade at a premium to soybean oil, opening the door for an increase in world soybean oil exports. The United States has a window of opportunity to capture some soybean oil export business from South America while their exportable supplies decline during the September-March period. Conversely, much of the increase in world soybean oil exports during April-September 1998 is likely to be captured by South America. We are projecting new-crop U.S. soybean oil exports at 2,300 million pounds versus our estimate for 1996/97 exports at 2,050 million pounds.
As of September 25, there were only 71,000 tonnes of new-crop soybean oil export sales on the books along with 565,000 tonnes of undelivered old-crop sales subject to being carried forward into the new-crop ledger in this week's report for October 2. Together, these sums total just 280 million pounds. Assuming that donations, which are not reported in the Export Sales report, equal 300 million pounds of our total new-crop export figure of 2,300 million pounds, then bookings are only 14% of projected commercial exports. While some might view the low bookings as casting doubt on our export projection, we view them as positive because it means that untapped buying power lies ahead as export bookings increase.
The recent strength in soybean oil and weakness in soybean meal) has increased the soybean oil share of the joint product value to 37% at the end of September from 29% in May. There were 13 years since 1969 when the oil share at the end of September exceeded that at the end of August, and it was a virtual toss-up (6 of 13 years) for a subsequent increase in oil share in October. We still expect a setback in the oil share as crush gears up to meet meal demand.
Soybean oil stocks at the end of August were reported at 1,700 million pounds, down from 1,978 million pounds at the end of July and 2,091 million in August 1996. We are projecting end-September stocks (old-crop ending stocks) at 1,620 million pounds, implying a slight decline during September. We expect record crush during the October-December period to build soybean oil stocks to 1,930 million pounds by the end of the year. In addition to our 432-million-bushel crush estimate for the quarter, our other assumptions for soybean oil in the first quarter of the crop year include: (1) quarterly soybean oil yields at 10.9 pounds per bushel versus 10.8 pounds per bushel a year ago, (2) domestic usage at a record (for any quarter) of 3,700 million pounds, and (3) exports of 700 million pounds versus 638 million last year. We expect, the peak in quarterly soybean oil stocks during the 1997/98 crop year to come at the end of March 1998 at 2,260 million pounds; then stocks should decline to 1,785 million pounds by the crop year's end. Such a stocks level would not be tight, but by that time, lower palm oil and coconut oil production are likely to be contributing to bullish market sentiment.
December soybean oil prices rallied into a gap from 24.40 cents per pound to 24.52 cents but then set back into the top end of the recent upward-trending trading channel. The low end of that channel is in the 23.30-23.50 range this week; with a gap at 23.29-23.36, the 23.30-cent level probably represents technical support. We think that much of the recent advance in soybean oil prices is in anticipation of a long-term bull market, and we are long-term bullish on soybean oil as well. However, we expect soybean oil prices to weaken when the soybean meal market finds support, which may not occur until late October. But, unless exports increase very quickly, it may be difficult for soybean oil to attain higher prices as weekly crush levels increase. A test of support near 22.00 cents is still possible, but having expanded the top of the trading range by 1 cent in September makes it a more onerous task to penetrate the prior low of 21.72 cents, as we had thought likely. However, funds are heavily net long and could trigger a sell-off on signs of technical weakness. We remain long- term bullish on soybean oil from the spring of 1998 on the outlook for reduced tropical oil production and a large infusion of prospective soybean meal supplies from a potential record South American soybean crop.
Anne Frick
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