May 15, 2014

Beans today, palm leaves tomorrow
Chinese demand and unexpectedly smooth Brazilian logistics lifted soy prices while rainy Southeast Asian weather depressed palm oil. Expect these trends to reverse themselves later in the year.
by Eric J. BROOKS
An eFeedLink Exclusive Commentary
Although the USDA's latest crop report paints a potential oversupply of soy, China undid all the bearish implications, meeting predictions of bountiful supply growth with unexpectedly strong demand. On the other hand, with Southeast Asia's rainy weather resuming, late May saw palm oil prices deflated 12% from their March peak. But as we shall, circumstances are preparing to shift market momentum from beans back to palm oil in the latter half of this year.

With corn prices softening, a shift in American Midwest acreage towards oilseeds is making the USDA forecast a record American soy crop of 98.9 million tonnes, a whopping 10.5% increase or 10 million tonnes over last year's harvest. Moreover, the relative improvement in soy returns relative to corn is also expected to boost acreages in Latin America and China. With the USDA expecting South American and Chinese soy production to rise by a collective 5 million tonnes, 2014-15's global soy output is expected to rise 16 million tonnes or 5.6%, to a record 299.8 million tonnes.
China, smooth Brazilian logistics keep soy strong
But for now, demand is racing ahead of supply: Boosted by unexpectedly strong Chinese demand, Oil World reported that from September 2013 to April 2014, world soy exports jumped, "by a staggering 30% to 77.4 million tonnes." Nor was there any letup in this trend in the first third of this year: April's record 12.9 million tonnes of world soy exports were keynoted by the 6.5 million tonnes of this sum going to China. It completely eclipsed the 11.1 million tonnes of soy exported in April 2013. The increase was clearly driven by China, which only imported only 4 million tonnes of soy in April 2013.
Going forward, Oil World expects a new, record volume of 7.4 million tonnes of Chinese soy imports in May. In all, China imported 22 million tonnes of soy in the first four months of 2014, 42% more than in the same period of 2013. With China importing soy at a ferocious pace and crushing margins forecast to improve over the next quarter, Oil World boosted the country's soy import estimate. After importing 59.9 million tonnes in 2012-13, Oil World expects 2014-14 China's soy imports to jump a whopping 18%, to 70.7 million tonnes, which is higher than the USDA's 69.9 million tonne estimate.
China's exceptionally strong pace of soy procurement was complimented by Russia, South Korea, Egypt and the EU, all of whom are seeing high meat prices fuel unexpectedly strong growth in domestic livestock production.
The resulting tight soy market cherry-topped by falling Indian soymeal exports, which left East Asian countries like Vietnam with 1.1 million tonnes less low-cost soymeal to buy during late 2013 and the first quarter of 2014. With India's rising poultry numbers absorbing a larger proportion of a smaller soy crop, at 3.55 million tonnes, this year's Indian soymeal exports are 18% below last year and 32% below their 2007 record of 5.3 million tonnes.
Amid dwindling Indian soy supplies, high Chinese soy demand and a palm oil production crimping drought in early 2014, Asian feed mills and vegetable oil buyers could not arbitrage Indian soymeal, Southeast Asian palm oil or palm oil kernels against limited US and Latin soy supplies.
Consequently, despite the optimistic US harvest forecast, soy demand in the first half of this year cannot be met from a crop that has not yet been grown. Depending on a significantly smaller old crop base, soy demand has kept pace with supplies, keeping CBOT soy relatively steady within the US$14.50/bushel to US$15.00/bushel range.

But while soy looks strong through the second quarter of this year, the situation may thereafter change. At the present moment, exceptionally high global demand is being met from last year's moderately smaller crop.
For several reasons, that will not be the case in the second half of the year: Part of the reason for China's import surge is that an unexpectedly low proportion of its Brazilian soy shipments were cancelled due to logistical delays.
According to Vanessa Tan, analyst with Singapore-based Philip Futures, "All the cargoes that Chinese importers booked aggressively in the past months are arriving now ... But this is creating a glut of beans in the domestic market ... From June onwards imports should start declining."
As a result, China is expected to move into a net soya bean glut situation during the third quarter –just as America's forecasted record soy crop approaches maturity. Along with a tapering off of Chinese soy imports, news of an exceptionally large US soy crop maturing as could make CBOT soy downtrend from the late second quarter onwards.
From their current level at US$14.80/bushel to US$15.00/bushel, Goldman Sachs anticipates CBOT soy falling nearly 30%, to US$10.50/bushel in November, citing "a slowdown in Chinese imports on high domestic stocks and the expected record-large US soybean acreage this summer."
Dry weather, high palm prices to return?
Although it could soften oilseed prices in the second half of 2014, the soy complex's deflation will probably not spread into the palm oil market. In fact, after the breaking of Southeast Asia's drought made palm oil tumble 12% from its early March peak of US$904/tonne to near U$790/tonne in early May, by the time of publication, prices had already staged a partial recovery to US$811/tonne.
Although firm soy prices helped firm up the palm oil market, there were also other factors supporting the palm complex. During the six previous months, high dairy prices boosted milk production in numerous feed-short countries including China, South Korea and even New Zealand.
Traditionally self-sufficient in pastureland, high Chinese dairy import growth coincided with a succession of droughts, causing demand for New Zealand milk to outstrip its limited supply of grassland. This led to rapid, 24.8% growth in New Zealand's palm kernel imports in just two years; from 1.41 million tonnes in 2011-12, 1.56 million tonnes in 2012-13 and an Oil World estimated 1.76 million tonnes this year.
Nor is New Zealand alone in stepping up its palm kernel import volumes. Warning that its estimates may be underestimating dairy industry demand, Oil World forecasts world palm kernel imports to rise a healthy 4.6% in the 2013-14 marketing year ending in September, to 6.8 million tonnes, from 6.5 million in 2012-13.
South Korean palm kernel imports are projected to jump 10% from 818,000 tonnes to 900,000 tonnes. Similarly, China's palm kernel imports appear on track to increase by 7.7%, from 520,000 tonnes to 560,000 tonnes.
Along with supporting the palm complex, the rising dairy output of Pacific Rim countries is leaving less palm kernel supplies available for its traditional European buyers. The EU may import 2.67 million tons of the meal in 2013-14, down 3.6% from 2.76 million tons in the previous marketing year.
With dairy prices softening, the impact of Asian palm kernel import growth will fade away from the demand side of the palm sector equation –but there is a new supply side factor looming on the horizon: Long-term weather prediction models unanimously predict that an overdue El Niño will take hold in the latter half of 2014 -in fact, at the time of publication, the eastern Pacific's ocean temperature anomaly had just increased into the range that qualifies it as an El Niño.
This ocean current temperature trend, if sustained, will bring a resumption of dry weather to Southeast Asia. This would mean that after drought curtailed production and boosted prices in the first quarter, and the resuming of rains softened palm prices in mid year, late 2014 should see a return of drought conditions to Malaysia and Indonesia.
Many things can change in the course of a few months, especially when they depend on the weather. Nevertheless, this much can be said with reasonable expectation: America's impending, record soy crop will mature just as Chinese imports tail off. As El Niño tends to bring hot, rainy weather to the Midwest, this year's harvest will not be adversely impacted by it. All this points to a bountiful harvest softer soy prices from the third quarter onwards.
-But that same El Niño is more than likely to cause a resumption of drought conditions in Malaysia and Indonesia. Palm oil inventories were already run down during early 2014's drought. A resumption of arid conditions would result in a normal mid-year palm oil output sandwiched between poor harvests at the beginning and end of 2014. The net result would be disappointing overall output and a late 2014 palm oil price rally, with prices matching or exceeding the US$900/tonne levels seen earlier this year.

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