June 2, 2008

 

Soy prices to average US$15 a bushel in 2008-09

 

 

Tight supplies amid burgeoning demand has prompted investment bank Morgan Stanley to predict US$15 a bushel soy for 2008-09.

 

The soy market needs optimal production from this year's crop - even with an increase in 2008 seedings - as inventories adjusted for demand remain tight and are likely to get tighter, according to Hussein Allidina, vice president at Morgan Stanley Research Global.

 

The current turmoil between the Argentine government and farmers puts increased export demand on 2007-08 marketing year US soy carryover inventories

 

Robust demand for US soy as well as steadily increasing domestic crush demand is expected to leave 2008-09 ending stocks at just 185 million bushels, leaving little room for weather disruptions and opening the door to potential price spikes, Allidina said.

 

As such, Morgan Stanley expects prices to average US$15 a bushel in 2008/09 before moving to US$16.00 to reflect the cost of bringing on additional acreage in South America.

 

Although the USDA expects a 17.6 percent increase in US soy plantings in 2008, strong demand should only allow inventories to increase slightly to 185 million bushels from 145 million bushels.

 

Just to keep inventories constant and meet growing world soy demand, South America needs to add quite a bit of acreage moving forward, Allidina said.

 

If global soy import demand were to grow by just 3 percent per year, Brazil and Argentina will need to increase area harvested to soy by a total of 14 million acres by 2009/10, to prevent their respective stock to use ratios from falling below the 10-year average, Morgan Stanley said.

 

While there is ample land in South America to expand, increasing production is adversely impacted by tax policies, poor rural credit and a lack of infrastructure, he said. In Argentina, if export taxes are kept at elevated levels, expansion of production is unlikely.

 

In Brazil, the marginal cost of production is US$13.50 a bushel and moving higher, so the price has to be right to provide an incentive for producers to expand acreage to meet global demand, Allidina said. Brazilian costs are higher due to a lack of infrastructure bringing soy to port.

 

However, within five years infrastructure will be better and the cost of production will come down, but for now fertilizer costs are rising and as long as the real rises versus the US dollar, price incentives have to be presented to expand acres, Allidina said.

 

The weakening US dollar, on which soy is traded, means farmers would find it harder to earn profits despite higher CBOT prices.

 

Allidina expects Chinese demand for soy supplies to remain constant due to massive losses in the country's hog population last year.

 

The Chinese government is providing incentives to rebuild those pig populations, and when they get those back, even more feed demand will be seen from China, as long as income growth continues, said Allidina.