wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 13, 1997) SOYBEANS: The USDA estimated this year's soybean crop at 2,722 million bushels in its October Crop report, down from 2,746 million last month. The crop figure was a bullish surprise to the market, which had generally expected an increase. In 14 of the 22 prior years when the October crop estimate was below the September figure, the January final was below the October report. Hence, the report is probably more constructive psychologically than fundamentally.
Total supplies declined 7 million bushels from last month's indication as the crop size fell 24 million bushels while beginning stocks were up 17 million. The USDA increased its estimate of exports 10 million bushels to 960 million but retained its crush estimate of 1,495 million. The USDA pegged 1997/98 ending stocks at 270 million bushels versus 285 million last month. Our carryover estimate, incorporating the October crop figure, is 244 million bushels, an adequate level at 9.3% of use; last year's ending stocks were 5.4% of use. However, supplies are generally considered tight if they are less than 10% of usage, and the prospect of soybeans losing acreage to corn next spring will necessitate a record South American crop. The outlook for a sharp increase in plantings in Brazil and Argentina bodes well for record production, but the market will be monitoring South American planting progress this fall and growing conditions this winter.
Harvest progress is well ahead of the five-year average. However, producer sales do not reflect the quick pace, a factor that has supported prices.
November soybean prices rallied sharply last week to penetrate their summer high of $6.75 per bushel (established in the overnight session August 4). The November contract has a pattern of ascending lows since July: $5.77 on July 7, $5.86 on July 21, $6.02 on August 18 and $6.20 October 1. The main factors supporting prices have been: (1) concerns that farmers will chose to store soybeans this year rather than sell them; (2) the outlook for a very large early season usage pace; and (3) ideas that the crop size may not increase from the initial indication. However. the strategy of farmer holding has hurt crush margins and may actually prevent early season usage from reaching the levels that might have been seen otherwise.
The strategy of storing soybeans is constructive to prices in the short run but bearish in the medium to longer term for the following reasons:
(1) The window of opportunity for large U.S. usage this season will be widest ahead of next spring's South American harvest; if near-term price strength curbs usage during this time period, it may not be recaptured later. (2) Higher prices this fall are likely to encourage further expansion in South America's soybean area, which would add to the already existing outlook for production.
(3) A postponement of farmer selling until the new tax year would push sales into the time frame where they would compete with South America.
(4) U.S. soybeans in storage will represent an overhang of supplies, potentially limiting rallies.
Hence, the action of farmer holding could change the price pattern that we have expected. It now appears that the harvest low in November soybeans was made at $6.02 in August. An August low is typical in years with an exceptionally high usage pace, as we expect this year. Normally in such “demand bull markets,” March soybeans rally to a new- crop-year high by the end of February. Often in such years, July soybeans trade above $8.00 at some point in the February-March period. However, farmer holding can change this expected price pattern, moderating the ultimate high. We had been looking for a high in the January-March period at $7.20, basis March, with the potential for a high of $8.00. Instead, the risk to our forecast is that farmer holding could push prices to a post-harvest high in November, setting up a seasonal price decline into February, rather than the counterseasonal price strength one would expect given the projected rate of usage. We would look for the rally to run out of steam in the $7.20 area, basis November. Futures prices above $7.00 should trigger farmer selling and a price setback could ensue. We look for an interim high by month's end and then a decline to $6.50-$6.70, basis January beans ($6.60-$6.80, basis March) followed by a rally to the $7.50-$7.80 level, basis March, in the January-March quarter.
With the October Crop report now past, the new-crop fundamental balance is becoming more set. However, there are still some reports and issues that bear watching, which we have listed:
MILESTONES BY MONTH–NOVEMBER–Watch soybean/corn price ratio for effect on South American soybean plantings.
–Brazil will be planting soybeans, so rainfall patterns there will have an impact on prices.
–The seasonal month-to-month palm oil production decline should begin in Malaysia, and the extent of the decrease bears watching.
DECEMBER–November oil yield is good indicator of crop-year oil yield and the monthly Crush report from the National Oilseed Processors Association (NOPA), to be released around the 15th, will be the first good indicator of this year's yield. The Census Bureau report will be a better yardstick but will be released a week to 10 days after the NOPA figure.
–Soybean plantings will begin in Argentina, and the soil moisture profile will be important to watch after last year's drought.
–By late December, the market will have a sense of the pace of October- December usage relative to October 1 supplies; a ratio above 27.5% tends to be associated with an early harvest low, counterseasonal strength in January-February period (i.e., not much of a “February Break” and a possible high in the spring. Also, there is a tendency for widening in old-crop/new-crop inverses. This year looks like a demand bull year, but should not be as dramatic as last year because of the outlook for increased South American soybean plantings.
JANUARY–The final Crop report for 1996/97 will be issued January 13.
–The December 1 Stocks in All Positions report will be issued January 13 and will serve as check on the crop size.
–Watch the October-December usage as a percent of October 1 supplies because July soybeans usually trade above $8.00 at some point between February and May if that figure is above 27.5%.
–Watch to see if Brazil changes its export tax policy to impose a tax on soybean exports. If so, it would hurt U.S. crush margins, crush level and crushers. It probably would boost the oil share of joint product value.
FEBRUARY–Growing weather in South America will be a market factor, particularly in Brazil. Argentina and Southern Brazil (in drought last year) should be wet, but watch new northern and northeastern production areas in Brazil for possible drought associated with the El Nino.
–The first USDA projections of 1998 production and the supply/demand balance will become available at the USDA's Agricultural Outlook Forum to be held February 23- 24.
SPRING–Look for a shift in product leadership from meal to oil. Monitor palm oil production for signs of a decline associated with drought in 1997 due to the El Nino.
–Watch the Prospective Plantings report in late March. Grains and oilseeds will compete for acreage, and tightening world grain supplies imply a possible decline in new-crop oilseed acreage and maybe in U.S. soybean plantings.
–Watch the Palmer Drought Index in March for hint of low subsoil moisture. The market will be extremely sensitive to moisture conditions given expectations of production problems next year because of the El Nino.
–The first World Board 1998/99 U.S. soy complex balance estimates will be released with the USDA's May Supply/Demand report.
SOYBEAN MEAL–Brazil's Commission of Biological Security (CTNB) decided last week to allow imports of up to 1.55 million metric tons (MMT) of transgenic beans, but only if they are used crushing, not planting. We have been forecasting that Brazil would import 1.2 MMT of U.S. soybeans and have not changed that forecast. We expect Brazil to import 2.2 MMT soybeans this year, a record level. Even with a record imports, however, Brazilian soybean meal export supplies should fall 1.5 MMT from the prior-year level during the October-March semester. Argentine exports during the period are expected to increase about 235,000 tonnes, which will do little to offset the drop in Brazilian supplies. Hence, it will be up to the United States and, to a lesser extent, India to help offset some of Brazil's export shortfall.
The U.S. agricultural attache in India increased his estimate of India's soybean crop to 5.0 MMT from 4.65 MMT previously; last year's figure was 4.1 MMT. He also increased his projection of Indian soybean meal exports to 3.0 MMT from 2.65 MMT previously and 2.5 MMT last year. Indian meal is competitive with U.S. and South American meal into the Far East because of its lower transportation costs. Another feature that some buyers find attractive is that Indian cargo sizes can be smaller, at 10,000- 14,000 tonnes.
In its Supply/Demand report, the USDA reduced its 1997/98 meal export projection to 7.4 million tons, probably reflecting the outlook for increased competition from Brazil and India relative to last month's estimates. However, we still look for U.S. soybean meal exports to reach a record 8.05 million tons. The export sales figure for the week ended October 2 showed an exceptionally large increase in bookings of 506,000 tonnes. In addition, 94,000 tonnes in unshipped old-crop sales were carried into the new-crop year. Hence, total commitments reached 2.601 million tonnes (or 2.867 million tons), which exceeded by 35% the total export commitments in the comparable week of 1979, the crop year that holds the record for soybean meal exports.
The USDA raised its domestic usage projection to 28.2 million tons from 28.0 million last month and 27.1 million in the year just ended. Hog numbers are increasing, which is a positive factors for meal feeding, but hog prices are declining, which could have an adverse effect on the feed outlook. Last week's increase in corn and soybean meal prices is exacerbating the effect of lower hog prices in pressuring feeding profitability, The weekly hatchery report continues to show eggs set and chicks placed up 2%-4% from year- earlier levels, indicating continued moderate expansion in broiler numbers. However, a softening export outlook may have an adverse impact on broiler prices; the USDA is projecting that calendar 1998 broiler exports will drop to 16.4% of production from 17% in 1997. Feeding profitability needs to be monitored carefully this season for signs of a possible weakening in domestic feed demand.
Soybean meal prices rallied sharply last week, partially on concerns that harvest movement would be too slow to permit adequate crush. However, cash meal basis levels have remained subdued, at near or below delivery values; stronger basis levels will indicate when crusher supplies are inadequate. Some of meal's price strength resulted from a recovery and upward correction in the meal share of the joint product value as we move into the season when meal consumption should be the determining factor in soybean crush. The recent low of $196.20 per ton was probably the harvest low. December meal penetrated its double high of $222. We had been looking for a winter high in the $240-$245 range on March soybean meal during the January-March period, However, if producers remain strong holders of soybeans, this level could be seen earlier. Such a scenario would hold the risk of setting up a bear market in soybean meal into the January-March period, especially if U.S. usage were curbed by the higher prices, as traders anticipate a record large South American soybean crop to be harvested this spring. However, we still expect record soybean meal usage to push prices higher into the January-March quarter.
Near-term, we expect the rally in December meal to run out of steam in the $230 area, and look for prices to set back toward the $205-$215 level ($200-$210, basis March). We are retaining our projection for March meal to make a winter high in the January-March quarter in the $240-$245 range, with the outside potential of $280.
SOYBEAN OIL–Last week's rally in soybean meal prices caused a reversal and decline in the oil share of the joint product value, probably in anticipation of a seasonal increase in soybean crush and on ideas that soybean supplies are lower than many had expected. (Soybean oil prices are less sensitive than meal to the level of soybean supplies.) The real source of support in the soybean and meal markets, and to a lesser extent in oil, comes from the very good demand outlook. We expect meal consumption, and primarily exports, to push U.S. soybean crush to record levels. As a result, oil will become the true byproduct of crush. The extent of oil's overproduction will depend heavily on soybean oil yield.
Even though the expected soybean oil yield this year is below normal, it has made gains on last year's level. Soybean oil yield is directly correlated with sunlight and temperatures during soybean pod filling, and temperatures at three key Midwest locations during August and September were below last year's level. Normally, lower temperatures would result in a lower oil content in the soybean, a situation that remains a risk for this year. However, yields may not be hurt as much versus last year for a couple of reasons: (1) last year's crop was later than this year's; and (2) there was an early freeze in fall 1996. However, the cool temperatures this summer should still produce a subnormal soybean oil yield. Another major factor that should adversely affect yield this year is reduced efficiency of oil extraction due to: (1) prospects for a record crushing pace; (2) new capacity coming on stream; and (3) the low moisture content of soybeans in the western Corn Belt.
The first good indicator of average oil yield will be the figure included in the Census Bureau's November Crush report. We have reduced our estimate of oil yield to 10.93 pounds per bushel from 11.0 pounds; the 1996/97 average appears to have been 10.88 pounds. The reduction lowered our end-December soybean oil stocks figure to 1,885 million pounds from 1,930 million and reduced our crop-year ending stocks to 1,660 million pounds from 1,785 million. The USDA is using an oil yield of 11.15 pounds per bushel in its balance sheet. The small difference, applied to our crush estimate, would equate to 333 million pounds of soybean oil production.
In its October Supply/Demand report, the USDA raised old-crop oil production 160 million pounds to reflect the fact that actual product-year crush exceeded their estimate. As a result, the USDA increased its projection of old-crop exports 50 million pounds to 2,050 million and raised its domestic usage estimate to 14,215 million pounds, up 165 million from the previous year. The department reduced its estimate of old-crop ending stocks by 50 million pounds to 1,550 million.
In the new-crop balance sheet, the USDA increased its projection of domestic usage by 25 million pounds to 14,325 million, 25 million pounds above our projection. In its initial production estimate for sunflowerseed, the USDA pegged the crop at 3,745 million pounds, up 4.4% from last year, a smaller increase than had been expected from acreage because yield was below last year's level. The estimate of peanut production fell 4% from both last month's and last year's projections while the cottonseed crop was about unchanged from last month and down 1% from last year. Supplies of competing fats and oils will be lower than previously thought, thus increasing potential domestic usage of soybean oil. The USDA increased its soybean oil export projection 150 million pounds to 2,400 million, 100 million above our estimate. New-crop ending stocks were estimated at 1,555 million pounds, about unchanged from the 1996/97 figure, but lower as a percent of usage at 9.3% versus 9.5%.
Export sales for the week ended October 2 were 88,200 tonnes, the second largest weekly figure in history. There were 46,200 tonnes of unshipped old-crop export sales carried forward onto the books for 1997/98. New-crop export commitments stand at 205,400 tonnes, or 453 million pounds, 20% of our projected crop-year exports. However, early season export sales are not a good indicator of subsequent exports for oil because there often is a surge in soybean oil shipments in the final quarter of the crop year.
December soybean oil prices rallied to a new high for the move last week. Fund buying was a noted feature and the large fund net long position makes soybean oil prices vulnerable to a sharp price decline on signs of technical weakness. December has a contract low of 21.72 cents per pound, which should not be penetrated. However, a setback to the 22.50- to 23.50-cent level is still possible, with the lower end achievable on long liquidation by funds. We expect price rallies over the winter to be capped on the high end by 26.00 cents. Longer term, we remain bullish on soybean oil, but don't expect a bull market in oil to begin in earnest until soybean meal comes under pressure.
Anne Frick
Added to the WWW 10-17-97
Last updated on 10-18-97
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com