October 1, 2007

 

Rising global demand spurs high soy prices and expanded acreage

 

 

Soy futures prices have risen steeply on expanding global demand, leaving markets in search for price equilibrium amid efforts to meet demand and lift supplies through increased soy production acreage.

 

The Chicago Board of Trade soy market has rallied nearly US$2.00 a bushel from its August lows. Long-range bullish fundamental outlooks keep speculative buyers enthusiastic and encourage global end-users to aggressively purchase US supplies ahead of expected tighter inventories in the 2007/08 marketing year, industry analysts said.

 

The nearby November contract rallied from its August 16 low of US$8.04 1/2 to Thursday's contract high of US$10.17 1/2, the highest level for a nearby soy contract in three years on continuation charts.

 

The soy market must stimulate prices enough to encourage Argentina and Brazil to plant more soy to offset the smaller US planted acreage in 2007, said Bill Nelson associate vice president with A.G. Edwards and Sons in St. Louis.

 

Analysts estimate that South America and the US need to plant 8 million more soy acres combined in 2008 to keep pace with rising global demand.

 

Soy are in a battle to steal back some acres from corn in the US, and with dry conditions in the world's second-largest soy producing country - Brazil - the market's outlook remains bullish, said Tim Hannagan, analyst with Alaron Trading in Chicago.

 

What's difficult is there is no definitive price target to know when the market will achieve its mission. That won't be known until months down the road, similar to what happened in corn when that market sustained a rally until US acreage increased substantially this spring, industry analysts said.

 

The target might not even be reached soon. There's a projected sharp drawdown of US soy supplies in the 2007/08 marketing year due to lower planted acreage this spring. Further, the Brazilian real has rallied against the dollar, so expanding soy production in Brazil is less economical. Those features will keep soy trending higher, analysts said.

 

"It's hard to figure out just how high prices will need to be, as soy are not only battling for US corn acres but will also face a battle with wheat as they vie for lost acres to corn as well," Hannagan said.

 

Prices could soar in early 2008

 

Strong demand should promote price strength through the fall, but a big price surge could be in store between January and March, Hannagan said. Any weather-related problems during South America's pod-fill stage - January to February - and a final push to secure US acres should surface in early 2008, he said.

 

Demand for US grain and soy supplies should continue unabated in the world markets due to continued dollar weakness.

 

The rapid economic expansion in China and other Asian countries has improved the diets of people who live there, leading to increased caloric intake. Increased use of vegetable oils globally will support soy as well, analysts said.

 

China alone is poised to buy 3.2 million metric tonnes of optional-origin soy each month between September and November on their potential for reduced crops, said Joe Victor, analyst with Allendale Inc. in McHenry, Illinois.

 

Not only do soy have to battle corn for acreage in 2008, but also wheat, as farmers could be lured by all-time high prices to plant that grain. Also, the high wheat prices mean there will be less substituting wheat in feed rations, which is supportive for soymeal, a soy product, Victor said.

 

In addition, higher crude oil prices continue to make biodiesel attractive, and with a host of new biodiesel plants ready to come on line, demand for soyoil - the primary feedstock for US biodiesel - will aide soy' price potential, he said.

 

CBOT November soy could pierce US$10.50

 

Victor said he sees the US$10.50 price level as the first reference point for nearby soy futures, with US$11.00 a bushel an achievable level in the next 30 days.

 

While the market is undoubtedly in a longer-term bullish trend, a short-term setback in prices could be in store ahead of the October crop report, said Anne Frick, senior oilseeds analyst with Prudential Financial in Chicago.

 

"The market has good risk of a US$1.00 setback before the fall US harvest reaches its 50 percent complete level," Frick said. "Nevertheless, whatever setback we get, prices will still be well above the August low, but even a bull market can't go up everyday."

 

While a modest correction is overdue, the market has taken on a new dynamic, with the strong influence of speculative fund money possibly changing seasonal harvest factors, Hannagan said.

 

The market normally retreats to set its harvest lows in early fall as crops come to market, but with a bullish demand outlook and speculative buyers aggressively pushing prices for inflationary reasons, exporters, crushers and global end-users are battling for fresh supplies ahead of expected tighter supplies, unwilling to risk waiting for South American inventories in the spring, Hannagan said.

 

This uncertain future is attracting the attention of the speculative money crowd as they attempt to front-run any further sharp price rally that might occur in a market that needs to draw additional production from global farmers, industry analysts said.

Overall, analysts said price appreciation could continue in the months ahead as more and more market watchers foresee the likely end result of sustained high usage levels steadily eating into inventories.