June 15, 2010

US soy futures miss out on rally in grains

Soy are to miss out on a rally which will send prices of the major up more than 10% by the autumn, as part of a long-term trend which will drive wheat prices back to US$7 a bushel in Chicago.

Underperformance in soy over the last few trading days looks the shape of things to come, as the world's rising stocks weigh on prices, at last, Societe Generale said.

The jump of 22% in global soy output in 2009-10 might already have dragged prices lower, were it not for strong imports by China, and reluctance by South American farmers to sell their record crops.

The oilseed's stocks-to-use ratio, a key measure of the market tightness which has a large impact on crop prices, looks set to rise above 27% by the end of the crop year from 19.4% at the close of 2008-09.

Chicago prices would average US$8.70 a bushel in the July-to-September quarter, a decline of more than 8% on the current spot rate, and 7% below the US$9.35 a bushel which August futures are factoring in.

Nonetheless, prices were not poised to go below US$8.50 a bushel as this would leave them at around the cost of production in South America, and so threaten sowing cuts which were unsustainable at a time of fast-growing demand.

Such a floor had been hit in 2006, when despite an ample supply of soy, more than what is expected this year, the price never went below US$5.50 a bushel, which corresponded to Brazilian production costs at the time, the bank said. Indeed, such logic implied that corn and wheat prices would not fall from current levels.

Grains also had growth in ethanol use on their side; with US regulators set later this year to increase the cap on blends of the biofuel with petrol from 10% to at least 12%. And they would also gain from the revival in livestock production, which has been boosted by consumers' greater spending power as the global economy revives.

According to the analysts, this means higher animal numbers in the 2010-11 season. In other words, wheat demand for feed, which rose substantially last year due to the reduced availability of corn, should remain high next year.

The bank forecast wheat prices averaging US$5.00 a bushel in the July-to-September period, a rise of 12% on current spot prices, on their way to US$7 a bushel by 2015.