October 20, 2008

    

 

Bearish macroeconomic forces have clouded the picture for Chicago Board of Trade soy futures, but once the dust settles from the global financial crisis, the market is poised to rally due to its bullish underlying fundamentals.

 

The combination of uncertainty about the US crop size, tight supplies and a potential decline in South American production could give soy futures a lift when the market returns to its fundamental roots.

 

Currently soy futures are linked at the hip with currencies, crude oil and the stock market, but the ultimate driver of prices will be determined once the market gets a handle on demand, said Dan Basse, president of AgResource Co. AgResource is an agricultural research and advisory firm in Chicago.

 

Fundamental analysis is difficult in the face of an uncertain economic climate, because it's unclear how much end-users will be able to buy if a global recession continues to move forward.

 

Nevertheless, baring any further collapse in the stock market, soy prices should be bottoming, said Joe Victor, an analyst with Allendale Inc.

 

November soy settled at US$8.94 a bushel Friday, down 45.4 percent from its peak of US$16.36 3/4 in July.

 

Seasonal price lows should be in with the US harvest progress near 60 percent complete, and with disappointing yield reports and supportive export demand, prices should be poised to move higher, Victor said.

 

Based off fundamentals, the November soy contract has the potential to retest the US$10.75-a-bushel level, and depending on US yields and demand, prices could climb back in the US$11.40 to US$11.50 level, Victor said.

 

Export demand for US soy is off to a solid start, with accumulated sales at 444 million bushels, reflecting a 7 percent increase from the 416 million bushels sold at the same time last year.

 

However, financial markets remain the wild card, as despite good demand, analysts remain concerned that a global recession and firmer US dollar will weaken demand for US exports.

 

Talk of smaller-than-expected South American planting and production prospects add another bullish twist. Brazilian farmers are faced with a tight credit situation, making it tough to secure loans to acquire high-priced fertilizer, Victor said.

 

Previously, analysts anticipated a 6 percent jump in Brazilian plantings and production, but due to credit issues and a weak Brazilian currency, analyst have begun to project plantings unchanged to possibly below year-ago levels. In the 2007-08 marketing year, Brazil soy plantings totalled 21.3 million hectares.

 

Tight supplies are also a factor for prices.

 

The US Department of Agriculture of Agriculture estimated US 2008-09 soy ending stocks at 220 million bushels, up from the previous forecast of 135 million bushels.

 

Nevertheless, despite the higher supply forecast, the 2008-09 marketing year's stocks-to-use ratio increased to 7.4 percent, up by less that 1 percentage point from the previous year and well below the 18.7 percent reported in 2006.

 

The world soy stocks-to-use ratio rose to 17.6 percent from 17.1 percent in 2007-08, but well off the 21.2 percent in 2006.

 

The small increase in domestic and global stocks-to-use ratios illustrate that despite increased production, usage is outgrowing output, said Victor.

 

Inflationary concerns are another factor that could lead soy prices higher. "The US is taking on a monetary policy of flooding the market with money to stem the tide of the financial crisis and this raises the spectre of medium- term inflation," said Mike Zuzolo, an analyst with Risk Management Commodities Inc.

 

"This policy could inflate asset prices like commodities and that could lean prices to retracing 25 to 35 percent of the losses seen since August highs and recent lows," said Zuzolo. "The big question is, will the large speculative and index funds return with a vengeance once financial markets show some stability," he added.