January 12, 2004



CBOT Soyoil Seen Supported By Decline In Stocks


The soyoil futures market at the Chicago Board of Trade should remain supported for the next several months given that supplies are projected to be very tight while demand for soyoil is inelastic - very hard to ration - analysts said.


U.S. soyoil stocks are expected to drop for the third consecutive year in 2003-04. Lower soybean production has resulted in smaller crushing and ultimately tighter soyoil availability.


And even though final production estimates are a long way from coming, talk that soyoil yields could prove even smaller than government projections marked the trade in the last couple months of 2003.


Anne Frick, oilseed analyst for Prudential Securities in New York, said there is a pattern for oil yields to start out low in October and increase as the season progresses, but this year could be different.


This marketing year, October soyoil yield was the lowest for the month since the 1996-97 season. Frick said the U.S. Department of Agriculture's soyoil yield could still come down another notch toward 11.20 pounds per bushel of soybeans or lower, which would be a decline of at least 0.07 pounds.


Other market sources suggested that a 10.9 pound per bushel yield could be seen this marketing year before the year is over. And for every 0.1 pound drop in yield this year, assuming the current crush estimate, some 148 million to 149 million pounds of soyoil would be lost in the total production number, Frick said.


Much of the problem was cool and moist weather during May, June and July, which affected soyoil yields, said Dick Loewy, vice president of commercial grain advisory for Doane Agricultural Services. Freezing conditions in parts of the eastern corn belt late in the growing season also added to the problem, he said. Oil yields in places like Ohio, Indiana and Kentucky could prove smaller due to that weather adversity, Loewy added.


All in all, lower soyoil yield would only aggravate what is already a tight balance sheet and that should keep prices well supported ahead assuming demand continues to emerge.


So far, soyoil usage has been stronger throughout 2003-04 than expected. While the USDA is projecting a 63% decline in soyoil exports this marketing year, in the first couple of months of the year, U.S. soyoil commitment pace was only lagging year-ago levels by 35%.


China, which has been a major wildcard in the soyoil demand story, has been importing more edible oil this marketing year as the state share of imports there declines and tariff-rate import quotas expand under the World Trade Organization accession agreement, Frick said. That pattern should hold into 2004.


But Loewy also warned that some cancellations have been seen in the last couple of months of 2003 and that overall, exports are not looking too solid to justify much higher prices, he said.


Nevertheless, additional support for the market should stem from the fact that supplies of alternative oils are also relatively low and overpriced when compared to soyoil, analysts agreed.


"Malaysian palm oil stocks are the lowest in five years and facing month-to-month production declines, which are seasonal, until March or April," Frick said.


Argentina's high-oil-content sunflowerseed production is expected to decline as the country replaces some area with more soybeans this year, which is a lower oil-yielding crop, Frick added.


On the bearish side, the market is faced with a large Indian oilseed crop, which is allowing that country to cut its edible oil imports. India is among the world's top oil importers.


Moreover, South America is again growing another record-breaking soybean crop and should ultimately be a very aggressive soyoil exporter in the spring, Loewy said.


Domestically, growing knowledge about trans fatty acids and its impact on health could push end users away from hydrogenated soyoil and hurt domestic use, Frick said.


Earlier this year, the Food and Drug Administration decided that products containing hydrogenated oils should start carrying labels specifying that given the product's health hazards.


"But these factors are probably outweighed by the bullish factors," Frick concluded.


According to Frick, the bottom line is that while supplies of soyoil appear to only be tightening further as the year progresses, other oilseed supplies around the world are also small at a time when demand for vegetable oils from places like China continues to do nothing but grow.


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