Transcript Document

$10 SOYBEANS -- WHY THEY MAY
STAY AROUND FOR AWHILE
•
Introduction: The “times they are achangin”. The literal explosion in commodity
prices has been in many cases a surprise to the market , with many wondering if this is
just a flash in the pan, or is it a move to a new plateau of world usage and price. We
have seen prices move higher often in the past due to droughts (1983, 1988 ) or
extraordinary demand (the 1970’s, and 1995/96) when a combination of a series of
events took prices we hadn’t envisioned.
•
All previous supply driven price rallies were eventually met with expanded supplies
either through better world weather or the release of acres into the planting mix that had
been under the a government supply management situation. The 1995 Freedom to Farm
Act basically eliminated price supports (replaced with the market clearing LDP program)
and removed price caps, allowing price discovery to determine the value of a commodity
without major government influence or manipulation.
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• Prior to this new era, another old era passed away—the Fall of Communism
opened up the world to free-enterprise, and free trade. We are still learning
from this new experience for which text books on how a market will respond
had not yet been written. We are charting new waters, allowing the world
market-place to discover price, and writing history that will be used five to ten
years from now by students of Agriculture who will proclaim, “so this is how a
free-market acts and reacts to expanding world affluence, demand for
commodities and corresponding price adjustments formerly restrained by
government trade and domestic policies.
• Uncertainty abounds, and it is no wonder the question of “why $10 beans, and
how long will it last, is being asked?” Price volatility brings anxiety by the
producer and end-user alike wondering if one missed the top to sell or the other
failed to cover needs at prices that just twelve months ago would have seemed
unlikely, and certainly not sustainable. I trust the following analysis of the
current state of the oilseed complex will be helpful in making informed
marketing decisions. Certainly we will all be a lot smarter down the road a
piece, but how we negotiate that road, and if we arrive successfully, will be the
test by which our ability to manage will be judged.
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• World Demand: The world demand for protein and edible oil
continues to grow at a very strong pace, and as a result the supplies
needed can no longer be guaranteed by the US as it used to be in the
past. Consequently our analysis has to be broader and more
knowledgeable than in the past. For example:
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• Palm production and usage has surpassed that of world soy bean oil, and S
American soybean production is now bigger than the US. Even as
agricultural demand, trade and pricing gets more globalized, the world will
continue to use the CBOT as its benchmark for speculative and hedging
purposes---and the global meeting place for price discovery and risk
management—that will not soon change.
• Bio-fuels have shown that domestic usage is becoming more of a dominate
factor than it once was and exports of our commodities of lesser importance
(but certainly important still) ---thus the “carryovers” are becoming more of
what is left for the world to purchase if/when other sources run out as was
witnessed by the explosive wheat situation this year 2007. As the world ran out
of wheat, it came to Chicago to cover its’ needs, the only available wheat
futures with the necessary liquidity, directly and indirectly affecting other
commodity prices.
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•
Those that analyzed the US soybean carryout these past 2 yrs totally missed the bull
market that lie ahead as such a carryover never warranted $10 soybean! In the past
many sourced fundamental information from the best in the business, yet it too was
insufficient as many of the best were still looking back to predict the future. It has been
via my discussions in columns (DTN and Top Producer) as well as in
seminars/conferences and in my Morning Comments (MC) for clients, that I have stated
that the world changed when communism fell and we opened the world to free enterprise,
and that using the past to predict the future was folly indeed running the risk of being in
huge error.
•
Recognizing then that world Ag is going more global, the speculator does not have too
many places to play than in Chicago making things more crowded with big increases in
price volatility, and opportunity. So while the US becomes more domestically oriented, the
world speculative interests grows at the CBOT adding another dimension we did not have
just five years ago.
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• China has become a huge player in all the markets to the point that minor
changes (in their huge demand market) can create large moves in prices. Their
decisions on the yuan or whether to import or export commodities can have
significant influences on not only the price of soybeans but on freight rates as
they continue to buy and sell steel, coal and other non-Ag commodities, and on
the value of the US $ itself.
Unlike the US, the Chinese government can decide with a stroke of a pen to ban
imports or increase reserves—there are no congressional debates to get
people/markets ready for the consequences but merely and announcement that
can send shock waves through markets—remember their decision to stop
exporting corn, and to import corn in 1995-96 that was instrumental in sending
corn to $5.25? It mattered not to them that it would mean a critical shortage in
the US! China accounts for almost 50% of the world soybean trade. Their
appetite for edible oil and protein could send soybean prices to levels
comparable to the 1995/96 corn market.
China, is at the top of the list of problems that include water availability and
usage, desertification, and air pollution. Animal diseases keep popping up from
time to time that affect the price of meal and the margin of profit of hogs
themselves. Recently the problems in China and rumors of buying of pork, the
subsequent collapse in US Hog prices, and the desire of China to rebuild their
hog industry creating yet-to-be determined demand for soymeal, have all had
significant influence on the domestic US markets.
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• Price targets are moving almost weekly, if not daily. Whether it is
changing incentives into mandates, reducing or increasing
import/export tariffs or putting a ban on exports or quotas---- or as we
have recently seen, to allow the “splash and dash” on imported oils to
be re-exported with subsidies or to then take it away
completely, all huge implications to the business of
agriculture. There is no way to account for these decisions in a
simple S/D equation used successfully in the past. “The times are
achangin.”
Rest Regards,
Jerry Gulke, President
Strategic Marketing Services, Inc.
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We start the process of analyzing why this current market is different with the vegetable oil
complex. Wheat acreage around the world has reduced soft seed (rape-sun) acres, further
placing demand on soybean oil supplies and palm production. We are so tight in supplies,
we are in need of price rationing in an inelastic demand market. There is no room for a
reduction in southern hemisphere crops – period!
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WORLD SOYOIL EXPORTS
7000
6000
5000
4000
Argentina
3000
Brazil
United States
2000
19
Exports
91
/1
99
2
19
92
/1
99
3
19
93
/1
99
4
19
94
/1
99
5
19
95
/1
99
6
19
96
/1
99
7
19
97
/1
99
8
19
98
/1
99
9
19
99
/2
00
0
20
00
/2
00
1
20
01
/2
00
2
20
02
/2
00
3
20
03
/2
00
4
20
04
/2
00
5
20
05
/2
00
6
20
06
/2
00
7
20
07
/2
00
8
1000
0
The United States is not a big player in world exports, however a shortfall in South
American production, particularly Argentina, could significantly increase U.S. exports
resulting in price rationing.
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The % of production used for industrial
use has doubled in 7 years.
Doubling U.S. soyoil prices may not affect edible oil usage.
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Malaysian Palm Oil vs. U.S. Soybean Oil
Soy and Palm Oil track well---both reflecting price inelasticity, meaning demand not
yet affected by price.
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Malaysian Palm Oil vs. Rapeseed
Rapeseed has been lagging Palm recently—Mid Term targets suggest $500/ton for both.
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Weekly Soybean Oil
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Weekly Soybeans in USD
Weekly Soybeans in Real
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Weekly Soybeans
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CHINA SYNDROME
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40% of soybean trade is China
Protein demand in steady uptrend
Population in grade school = total population of U.S.
Hog industry in expansion
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China Soybean Usage and Imports
MY Imports (1000 MT)
TOTAL Dom. Consumption (1000 MT)
MT
60000
48,800
50000
Consumption
40000
30000
36,000
20000
Imports
10000
19
93
/1
19 994
94
/1
9
19 95
95
/1
9
19 96
96
/1
19 997
97
/1
9
19 98
98
/1
19 999
99
/2
0
20 00
00
/2
0
20 01
01
/2
20 002
02
/2
0
20 03
03
/2
20 004
04
/2
0
20 05
05
/2
0
20 06
06
/2
20 007
07
/2
00
8
0
A growing affluent population, pork tonnage being replaced by broilers, and limited
acreage suggest imports of soybeans will continue to increase year over year.
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U.S. Share of China Soybean Imports
40,000
90.00%
35,000
80.00%
30,000
70.00%
60.00%
20,000
50.00%
Market Share
1,000 MT
25,000
15,000
40.00%
10,000
30.00%
5,000
0
20.00%
96/97
97/98
98/99
99/00
00/01
01/02
02/03
03/04
04/05
05/06
06/07
07/08
Chinese Imports
U.S. Share of Chinese Imports
China should try to maintain the U.S. as a major supplier to facilitate an orderly
import flow.
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China Share of U.S. Soybean Exports
32,000
50%
45%
30,000
40%
35%
30%
26,000
25%
24,000
Percent
1,000 MT
28,000
20%
15%
22,000
10%
20,000
5%
96/97
97/98 98/99 99/00
00/01 01/02 02/03
Date
03/04 04/05 05/06
06/07 07/08
U.S. Exports
China Share
China’s share of U.S. exports should continue to grow making us a more vulnerable
and less predictable market.
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U.S. Share of World Soybean
Export Trade
85,000
75.00%
70.00%
75,000
65.00%
1,000 MT
55.00%
55,000
50.00%
45.00%
45,000
Percent
60.00%
65,000
40.00%
35.00%
35,000
30.00%
25,000
25.00%
96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08
Year
World Exports
U.S. Share of World Imports
We are becoming a residual supplier.
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China Share of World Soybean Exports
50%
75,000
45%
China Share
40%
65,000
30%
55,000
25%
45,000
Percent
1,000 MT
35%
20%
15%
35,000
10%
25,000
5%
96/97
97/98
98/99
99/00
00/01
01/02
02/03
03/04
04/05
05/06
06/07
07/08
Year
World Exports
Chinese Share of World Exports
Understanding China stats and how China approaches world markets will
become increasingly important.
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It isn’t just China!
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China Soybean Meal
35,000
Total Domestic Consumption
30,000
(1,000 MT)
25,000
Average Annual increase = 11.55%
20,000
15,000
10,000
5,000
0
96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08
Year
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Chinese Pork Production vs. Imports
700,000
14
12
650,000
10
8
550,000
6
(100 Head)
(1,000 MT)
600,000
500,000
4
450,000
2
400,000
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
2005
2006
2007
2008
Year
Production
Total Imports
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Chinese Poultry
Avg. annual production growth = 2.48%
11,500
700
5% Last 2-years
11,000
600
500
1,000 MT
10,500
10,000
400
9,500
300
9,000
8,500
1,000 MT
12,000
200
8,000
100
7,500
7,000
0
1996 1997 1998
1999 2000 2001 2002 2003 2004 2005
2006 2007 2008
Production
Total Imports
Linear (Production)
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Weekly Soybean Meal
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Why will we continue to have $10 soybeans well into next year?
• Inelastic and growing world vegoil demand battles tight supply scene
• Meal demand will stay strong due to higher prices of world feedgrains
• Mandated biofuel usage in the world marketplace
• Burgeoning meat demand in the prospering Far East
• Necessity of 2.5 to 3 ratio to corn prices going forward
• Increasing world poultry as % of total meat consumption
• Currency problems for Brazilian producer
• Lack of genetics for yield response in US
Strategic Marketing Services, Inc.
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Continued
Does the outlook preclude that we can be complacent?
Absolutely not!
We do not yet know crop acres in N or S America
Weather will have a huge impact on prices
Analyzing market in a world environment is an on-going situation
Market analysis has to be flexible and responsive to changes in the
fundamental/technical outlook
Weekly outlook often needs to be supplemented with daily information
Strategic Marketing Services, Inc.
www.jerrygulke.com