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Soy Stocks Fall Most Since 1996 Amid Brazil Drought: Commodities
Perspective | 02 March 2012

Global reserves of soybeans are shrinking the most in 16 years as demand for food, feed and fuel rises, creating the biggest-ever exports for US farmers.

Inventories at the start of the next season on 1 October will be 20 percent lower than a year earlier, Jefferies Bache predicts. Prices that rose 7.8 percent since 30 December will gain another 7.5 percent to US$14 a bushel by June, the New York-based commodities trader estimates. China signed deals in the week ended 17 February to buy 13.4 million metric tons from the US, about what its own farmers grow in a year. The US Department of Agriculture anticipates record global exports in 2012.

The oilseed’s gains contrast with outlooks for wheat and corn, with the United Nations forecasting record supplies of cereals this year in response to prices that more than doubled since 2005. Soybean futures in Chicago fell to a 14-month low in December, spurring US farmers, the world’s top growers, to consider switching more land to grains just as drought curbed harvests in South America, the largest producing region.

“Tight supplies will continue until the end of next year,” said Dan Cekander, the director of grain research at Newedge USA, the biggest broker on the Chicago Board of Trade, where contracts for about 24.4 million tons of soybeans traded daily last year. “The smaller crop in South America means China will buy record quantities of US soybeans.”

Agriculture Index
CBOT futures rose 19 percent since the December low and closed 27 February at US$13.025 a bushel. Wheat prices that fell to a 16-month low in December are unchanged this year, while corn gained 0.3 percent. The Standard & Poor’s GSCI Agriculture Index of eight commodities rose 1.9 percent, while the MSCI All- Country World Index of equities gained 10 percent. Treasuries lost 0.3 percent, a Bank of America Corporation index shows.

Hedge funds doubled bets on higher prices in January and are now the most bullish since September, Commodity Futures Trading Commission data show. The most widely held option for delivery after the US harvest gives owners the right to buy at US$16 before 26 October, CBOT data show. The premium for July futures over the November contract has more than tripled since 9 February to 29.25 US cents a bushel, reflecting mounting concern that supplies will be tight in the first half of the year, exchange data show.

Commodities Team
Morgan Stanley’s commodities analysis team, led by New York-based Hussein Allidina, told investors in a report 21 February that they still favoured buying the November contract even after the rally. Soybeans are a better bet than corn over the next 12 months, Goldman Sachs Group Incorporated’s analysts, led by Jeffrey Currie in London, wrote in a report 22 February. Rabobank’s team, led by Sydney-based Luke Chandler, said in a report 20 February it was most bullish on beans among agricultural commodities.

Slower economic growth in China may put a brake on the rally. The country, which accounts for about 60 percent of imports, will expand 8.5 percent this year, compared with 9.2 percent in 2011 and 10.4 percent in 2010, according to the median of 21 economist estimates compiled by Bloomberg. The nation imported fewer soybeans for a second month in January, in part because of a weeklong public holiday, government data show.

Global growth will slow to 3.3 percent this year, from 3.8 percent in 2011, the International Monetary Fund forecast in January. The Euro region of 17 nations will contract 0.5 percent, the Washington-based group said. The 27-nation European Union is the second-biggest soybean importer.

Switching To Corn
“China is not going to buy as many soybeans as people think,” said Chad Henderson, a market analyst at Prime Agricultural Consultants Incorporated in Brookfield, Wisconsin. “The global economy is barely treading water, and the European debt crisis isn’t over.”

US production may increase more than forecast as higher prices discourage growers from switching to corn. While farmers can still make about US$128 an acre more from corn, that compares with US$215 in November, according to the Morgan Stanley report. The November soybean contract, reflecting anticipated prices after the US harvest, now costs 2.3 times more than December corn futures, up from a ratio of 1.99 in November, data compiled by Bloomberg show.

Drought in South America, where farmers harvested in February, caused “irreversible crop damage” and will reduce global production by 7.1 percent, Hamburg-based research company Oil World said in a 21 February report. The Rosario Cereals Exchange cut its forecast of Argentina’s crop on 23 February by 10 percent from its January estimate.

Reduced Supply
Brazil and Argentina, the largest growers after the US, will collect 120 million tons, the USDA said 9 February, down from a December forecast of 127 million. The reduced supply will mean a 22 percent jump in exports by the US in the year that begins 1 September, to a record 42.2 million tons, the USDA said 24 February. It anticipates global exports of 92.79 million tons.

Demand for soybeans increased at almost four times the pace of population growth in the past decade, government data show. About 66 percent of soybeans go into meal fed to livestock, 16 percent into vegetable oil used in cooking and biofuel production, and most of the rest is consumed directly as food. Ford Motor Company, the second-largest US automaker, is using soy-based foam in car seats and head restraints.

Meal consumption tripled since 2002 in China, the world’s largest pork consumer. Its farmers will produce 676.3 million pigs this year, government data show. To provide enough feed, soybean imports will have to increase 62 percent in the next decade, the USDA said 13 February. China was the largest buyer of US farm products in 2010 and 2011, supporting more than 160,000 American jobs, according to government data.

Arable Land
During Vice President Xi Jinping’s visits to Iowa and California earlier in February, China signed 21 agreements to buy US soybeans, the US Soybean Export Council said. The Asian nation has 21 percent of the world’s population and less than 9 percent of its arable land. Pork prices in China increased to a record in September and are still 25 percent above the five-year average, government data show. Inflation rose to a three-year high of 6.5 percent in July.

“Rising pork prices were an important part of China’s inflation problem, and the government is keenly aware that it needs to improve pork production,” said Richard Feltes, the vice president of research for R.J. O’Brien & Associates, a Chicago-based futures broker. “China is going to need to buy more soybeans from the US.”


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