Welcome to the Tuesday edition of FutureSource.com's Fast BreakTM.
Today's author is Walsh Trading Research. Walsh Trading Inc maintains it own research department. Daily reports such as Grain and Oilseed Daily, Global Economic Daily, Livestock, Softs, and Circuli Dominare are published and distributed to clients and potential clients. In addition to daily reports, a Bi-Weekly newsletter concerning all markets is also published. As well as written material, Walsh Trading Inc also posts to its website as series of intraday reports by various contributors in an audio format which plays right on your computer. Veteran traders as well as veteran market commentators post these reports. |
Soybean Fundamental Outlook, 2006
The beginning of the 2006 season may very well witness the highest prices for the soybean complex we will see for the crop year. The most recent USDA agricultural supply and demand estimates echoes this sentiment with a confirmation of larger than anticipated stocks, supply, and carryout. For a more complete understanding it is important to break the soybean complex into its individual components: soybeans, soybean meal, and soybean oil.
Soybeans
Once again, the old adage: "Big crops get bigger" has manifested itself as the soybean production number was raised to 3.086 billion bushels, up 43 million bushels from the figure reported in December, 2005. This production number was realized because the USDA raised the yield per acre by 0.6 to 43.3. This number shows the resilience of the genetically modified plants as rains this past growing season were received just in time and the yields proved to be some of the largest on record.
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These production numbers, coupled with the current government demand estimates, will leave the ending stocks at a gargantuan 505 million bushels. This figure is the second highest carryout on record. While this carryover figure is extremely large, it appears likely it will continue to grow most likely approaching 600 million bushels in the months to come. This is likely as the USDA export figure of 950 million bushels, down from 1.020 billion bushels in December, is most likely still too optimistic. The current weekly export pace is
approximately 25 percent behind a year ago. Assuming an overall reduction of 20 percent, the final export figure would be further reduced by another 70 million bushels, thus increasing the final carryover to 570 million bushels. This calculation assumes the USDA crush numbers are accurate and at present we will not debate this point.
In addition to the growth in the domestic numbers, the USDA also raised the Brazilian old crop numbers by 2 million tons. The current weather situation in the southern hemisphere looks good with but a few problem areas. Assuming a normal growing season from this point forward the world carryover will have grown over 12 million tons since the 2003/2004-crop year, 35.68 million tons versus 48.11 million tons. The primary point is that with soybeans near $6.00 presently, be on the lookout for a potential break that could take the market below $5.00 per bushel.
Soybean Meal
The current situation for the soybean meal is interesting, as the soybean meal market has lost value relative to the soybean oil market recently. This relationship may be over, however, the flat price of soybean meal should continue to decline along with soybeans as the fundamentals for soybean meal grow more and more bearish going forward.
The reality of domestic livestock feeding is that profitability is waning as both hog and chicken prices are declining. This trend will continue, especially in the hog market, as weights are currently at record levels with each hog producing a record amount of meat. In addition, weekly kills are just under all time record levels. These factors will lead to enhanced feed consumption, as packer margins come under pressure.
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The world market in the soybean meal should be viewed as potentially bearish with continued concerns over avian flu and a potential for more outbreaks over larger and larger areas. A pandemic outbreak does remain a concern as well as outbreaks in Canada or Alaska. In addition, any global slowdown in 2006 will certainly affect overall meat demand for both chicken and hogs. It is important to keep the duration of the recent global expansion in numbers of chickens in perspective. All good things come to an end, or at the very least take a
breather.
Soybean Oil
When all is said and done, the soybean oil market should prove to be the most bearish component of the soybean complex on a relative basis. This is true for a number of reasons. With the USDA production increase and the realization of soybean oil yields at record levels (currently the soybean oil yield is 11.65 pounds per bushel with a potential for 11.7 a distinct possibility) the domestic production number should continue to climb. The current production number is 20.155 billion pounds. This is up from the December figure of 19.865 billion pounds. A confirmation of an 11.7 pound yield will add that much more to the production numbers.
Also, the USDA is using an export figure of 1.350 billion pounds, unchanged from December. This number is over 400 million pounds higher than two years ago and at the current export pace, is unattainable. The more likely scenario is an export figure of approximately 1.1 billion pounds, a reduction from the current USDA figures of 250 million pounds.
The USDA continues to increase domestic usage with the assumption for large increases in the bio-diesel program. While this may be likely and a shift to bio-diesel is underway, a price break in the energy markets may take the edge off of expected growth in the bio-diesel arena.
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The potential for further increases in the soybean oil yield and the reduction in the export pace ultimately will have significant ramifications for the soybean oil carryover. The USDA currently has estimated an ending stocks number of 2.469 billion pounds. This is up from the December number of 2.329 billion pounds. This number will grow assuming a 250 million pound reduction in exports as well as an increase of 35 million pound gain based on yield. A final soybean oil carryover of 2.770 billion pounds is very possible. If realized,
this carryover will be larger than the largest carryover realized in the last 30 years. Another factor lending itself to a further carryover increase is the stocks figure as of December 2005 at 2.502 billion pounds. This is the largest stocks figure ever for this reporting period.
To equate these record stocks to potential price, a comparison to the four largest stocks in the last 30 years relative to price is important. In 1987 stocks were 2.0 billion pounds and the low in price that year was 15 cents. In 1991 with a stocks figure of 2.2 billion pounds, the low in price was 18 cents. In 2000 with a stocks number of 2.7 billion pounds, the price was 14.35 cents. And, finally, in 2001 with a stocks number of 2.3 billion pounds the low in price was 14.78 cents.
There are a number of other bearish factors to consider relative to the soybean complex. Among these are that domestic sunseed production doubled to 4.018 billion pounds from 2.0 billion pounds. Canola production has increased by 240 million pounds and is at a record production level for Canada, further adding to competition to U.S. soybean oil exports.
These factors, coupled with the others noted above, will ultimately drive soybean oil prices lower. With current prices at 21.50-22.00 cents per pound, look for a break of approximately 5 cents per pound to 16 or 17 cents per pound.
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About
the Author
| Walsh Trading Inc maintains it own research department. Daily reports such as Grain and Oilseed Daily, Global Economic Daily, Livestock, Softs, and Circuli Dominare are published and distributed to clients and potential clients. In addition to daily reports, a Bi-Weekly newsletter concerning all markets is also published. As well as written material, Walsh Trading Inc also posts to its website as series of intraday reports by various contributors in an audio format which plays right on your computer. Veteran traders as well as veteran
market commentators post these reports |
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Our Fast Break Readers
Disclaimer
The Commodity Futures Trading Commission has asked us to also advise you that trading futures is not without risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders! Opinions expressed by Fast Break authors are not those of FutureSource.
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There is no one Holy Grail for trading. A combination of fundamental and technical analysis can be used to a better advantage than a single discipline when making trading decisions.
-Walsh Trading Research
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