FEED Business Worldwide - October / November, 2011
 
Soy's market outlook turns bullish: Should you take a gamble on the weather?
 
by Eric J. BROOKS
 
 
Despite increasingly loud economic tremors and yet another round of financial market panic, grains and oil seeds prices appear to be holding their own. Neither crashing equity markets nor a rising US dollar were able to exert much impact on the cost of CBOT feed crop futures.
 
While some speculate that a return to world recessionary conditions could trim meat demand, such an outcome (if it occurs) is still months away. For now, supplies are tight and expected to be revised to even tighter levels. That is why rather than swooning, feed crops held their own amid the financial turbulence, waiting for the official revision of harvest estimates early next week.
 
 
Fundamentals getting tighter
 
Corn remained firm in the US$7.50-US$7.60/bushel range, with traders anxiously awaiting Monday's USDA report on the crop's status. While it showed more weakness than corn earlier in the year, soy strengthened by more, trading in the US$14.20-US$14.30/range, up 10% from its early August lows just above US$13/bushel. Indeed, after taking a back seat to corn for more than a year, soy of late has come to equal corn's price performance.
 
Part of soy's recent strengthening comes from realization that everywhere from China to South America, high corn prices may have reduced soy planted acreage by too much. While global soy inventories are not at the critical levels of corn stocks, at 4.9%, America's soy stocks-to-use ratio is low enough to force this oil seed's price to play 'catch up' to corn in the present situation.
 
Furthermore, a combination of reduced planted area and less-than-ideal growing weather is making many analysts conclude that the USDA's 83.2 million tonne soy harvest estimate is too optimistic. Analyst firm Allendale, for example, is forecasting an 81.9 million tonne harvest. This down roughly 10% from harvests of 91.4 million tonnes and 90.6 million tonnes in 2009 and 2010 respectively –and export demand has undergone significant expansion over this time.
 
Moreover, with South America's having suffered several disappointing harvests over the last few years, much of the recent growth in world soy demand was met through unexpectedly high American export volumes in 2009 and 2010. Evidently, with America's soy harvest falling at least 10 million tonnes short of expectations, that will not be the case this year.
 
 
Exports, inventory trend on Latin America's side
 
Germany-based analysts Oil World made it clear that with US soy output falling by roughly 10%, "Demand for US soybeans must indeed be rationed, and most of this will probably be done in exports." It concluded that, "US exporters will lose market share in October/December, their peak export season," with trade being picked up by Argentina and Brazil.
 
But is the America's disappointing harvest on its own enough on its own to push up the price of soy? The answer is a no. In fact, even if the US harvest were to come in a catastrophic 10 million tonnes below the 81 to 83 million already forecasted, this would result in America losing market share but actual soy availability would not be threatened.
 
This is because while the USDA expects year-ending soy inventories of only 4.22 million tonnes, Brazil and Argentina are currently sitting on soy inventories of 18.7 million and 22.4 million tonnes respectively. The 41.1 million tonnes of soy collectively held by Brazil and Argentina equals the most soy America ever exported in a year.
 
Hence, while a bad US harvest will bring more export opportunities Latin America's way, for now supply-side implications on their own are insufficient cause for a soy rally. Instead, all other things being equal, soy's price will only rise to the point where it can compete with corn for scarce crop growing acreage.
 
 
How La Niña can trigger a rally
 
There is however, one wild card that could still trigger a soy rally and that is the weather. More than half of the last five Latin American soy harvests have been upended by bad weather. These were mostly caused by either El Niño (hot ocean current) or La Niña (cold ocean current) phenomenon, which impacts South America's crop growing weather more than any other part of the world. Of the two, La Niña has a particularly devastating effect on Argentina's soy crop.
 
For example, a strong La Niña event during the 2008-9 growing season caused Argentina's soy harvest to plunge by 30.4%, to 32 million tonnes, from 46 million the previous year. Argentine soy exports crashed an even harder 59.4%, from the previous year's 13.8 million tonnes to a mere 5.6 million tonnes. That catastrophic Argentine crop was one reason why after the 2008's financial market crash, soy prices recovered before that of corn.
 
Then in 2010-11, another La Niña event caused Argentina's soy crop to fall by 10.1%, from the previous year's 54.5 million tonnes to 49.0 million. That year's exports fell by 35.1%, from the previous year's 13.1 million to 8.5 million tonnes.
 
Of course, chances are you never heard of El Niño and La Niña's impact on the weather for a very good reason: In the past, with the United States accounting for up to 70% of world soy exports, a drop in Brazilian or Argentine production did not rock the market that much. Today, with Brazil and Argentina making up over half of world soy exports, shifts in South America's weather move the soy market much more than they did in the past. With the poor US crop making its share of world soy exports fall even further, bad Latin American growing weather would have an unusually large impact on prices at this time.

 
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