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Outlook 2012: Global Markets

A Special Report from David Hightower, Principal at the Hightower Report


The general trend for soybeans in the first part of 2012 looks to be down, but the break into late November has left the market a bit oversold, and a bounce might be expected in the near term. With US soybean exports off to a slow start this year and the crops in Brazil and Argentina looking good, it appears that the longer-term supply/demand fundamentals will stay in the bear camp into early next year. However, recent estimates from commercial traders in China indicate their import demand for the 2011/12 season may be closer to 60 million tonnes, rather than the 56.5 million the USDA is currently estimating. Into late November the soybean complex was showing signs of being oversold, and January soybeans had already corrected 374 off the late August peak. Any sign of adverse weather in South America could spark a dramatic recovery rally.

With tightening vegetable oil stocks, declining palm oil production, and an increase in bio-diesel demand in South America and the US, soybean oil stocks could tighten up quickly. By November 2011, US soybean oil stocks had already declined five months in a row. If there is a weather issue in South America, soybean oil will probably offer significant rally potential for early 2012. Palm oil production in Malaysia was already dropping off quickly in November from October due to excessive monsoon rains, and production is likely to continue to slip into February. This suggests demand for soybean oil could jump relative to palm oil.

US soybean oil ending stocks and the stocks/usage ratio are expected to drop to seven year lows for the 2011/12 season. Expanding bio-diesel usage in the US, Argentina and other key producing countries could be a supportive force this coming season. US subsidies will halt at the end of 2011, so usage will be much more dependent on energy prices. Argentina may shift to a 10% bio-diesel mix from 7% at present, and both production and exports should reach a record high. A surge in Black Sea sunoil output helped pressure vegetable oils into the fall of 2011. Russian oilseed production reached a record 12 million tonnes, up from 7.46 in 2010. However, by the end of 2011 much of the exportable oil from that region may already be booked.

Growth in palm production is expected to slow in 2012 as it will be difficult for palm trees to keep up the production pace from 2011. If so, demand for other vegetable oils is likely to increase. With a 3-year low in ending stocks, the palm oil stocks/usage ratio will be tight, so oilseed production from South America will be relatively more important for 2012.

Bearish outside market forces put pressure on international vegetable oil prices recently and fund traders have made a big push to short soybean oil in the US. Open interest climbed more than 37,000 contracts from November 15 to November 25, during a period when January soybean oil prices fell from 52.90 to 48.35. This suggests that fund traders added to their hefty net short position. For the week ending November 22, non-commercial traders were net short 20,512 contracts, an increase of 12,825 for the week. Non-commercial and non-reportable traders combined held a net short position of 27,247 contracts, up 18,160. Aggressive spec selling is a short term negative force, but many traders view soybean oil as oversold.

“Food for fuel” issues might emerge if crude oil prices stay high. Traders will also monitor India’s production closely, as a weather problem there could spark import demand.

For soybeans, traders will be monitoring the La Nina event closely. It could spark dryness issues, especially in Argentina and southern Brazil. China will be a swing factor again this coming season, and most traders see this as a potential positive force for 2012. But with normal weather for South America and the US, ending stocks for the 2011/12 and 2012/13 seasons could expand.

With a record South American supply in late 2011, China was still buying Brazilian soybeans. This is traditionally the most active period for US exports. Traders were already revising their export forecasts for the US down by 50-75 million bushels as a result. The market also believed that South America had the soil conditions and the incentives to see another big crop harvest in early 2012. This could push US ending stocks for 2011/12 closer to 250 million bushels, as opposed to the October USDA estimate of 160 million and the November estimate of 195 million.

For the 2012/13 season, soybean traders were pricing in a bearish global economic outlook into late November, so any improvement in the forecast could lend support to the soybean market. However, until there is a weather issue in South America or the US, the lack of a “story” for the soybean market will likely limit fund trader participation.

Strong producer returns for soybean production in 2011, the likelihood that 2012 will not see the loss of acreage that occurred in 2011 from poor weather and the expected movement of acreage out of the CRP program suggest soybean planted area could jump in 2012. We estimate that plantings could reach 77 million acres, an increase of 2 million from 2011. If we assume a return to a more normal yield of 43.9 bushels per acre and also assume a jump in usage of 1.8% due to lower prices, we still end up with an ending stocks forecast of 429 million bushels for 2012/13, up 120% from 2011/12 and the third highest in 25 years. This would also push the stocks/usage ratio to a six year high of 13.7%, up from 6.3% in 2011/12 and 6.6% in 210/11. With a setup like this, the bulls will be counting on abnormal weather for a third year in a row to rationalize a return to the bull trend. If the global economic outlook for growth and/or inflation does not cooperate into the first quarter of 2012, we could see a resumption of the downtrend that began in September.

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