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$10 SOYBEANS -- WHY THEY MAY STAY AROUND FOR AWHILE.
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$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. www.jerrygulke.com
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. www.jerrygulke.com
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: www.jerrygulke.com
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. www.jerrygulke.com
Those that analyzed the US soybean carryout these past 2 yrs totally missed the bull marketthat 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. www.jerrygulke.com
China has become a huge player in all the marketsto 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. www.jerrygulke.com
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. www.jerrygulke.com
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! www.jerrygulke.com
WORLD SOYOIL EXPORTS 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. www.jerrygulke.com
The % of production used for industrial use has doubled in 7 years. Doubling U.S. soyoil prices may not affect edible oil usage. www.jerrygulke.com
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. www.jerrygulke.com
Malaysian Palm Oil vs. Rapeseed Rapeseed has been lagging Palm recently—Mid Term targets suggest $500/ton for both. www.jerrygulke.com
Weekly Soybean Oil www.jerrygulke.com
Weekly Soybeans in USD Weekly Soybeans in Real www.jerrygulke.com
Weekly Soybeans www.jerrygulke.com
CHINA SYNDROME • 40% of soybean trade is China • Protein demand in steady uptrend • Population in grade school = total population of U.S. • Hog industry in expansion www.jerrygulke.com
China Soybean Usage and Imports Consumption Imports A growing affluent population, pork tonnage being replaced by broilers, and limited acreage suggest imports of soybeans will continue to increase year over year. www.jerrygulke.com
U.S. Share of China Soybean Imports China should try to maintain the U.S. as a major supplier to facilitate an orderly import flow. www.jerrygulke.com
China Share of U.S. Soybean Exports China’s share of U.S. exports should continue to grow making us a more vulnerable and less predictable market. www.jerrygulke.com
U.S. Share of World Soybean Export Trade We are becoming a residual supplier. www.jerrygulke.com
China Share of World Soybean Exports Understanding China stats and how China approaches world markets will become increasingly important. www.jerrygulke.com
It isn’t just China! www.jerrygulke.com
China Soybean Meal www.jerrygulke.com
Chinese Pork Production vs. Imports www.jerrygulke.com
Chinese Poultry www.jerrygulke.com
Weekly Soybean Meal www.jerrygulke.com
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. www.jerrygulke.com
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
