Prudential: bearish on soy after short spike

By Nicholas Zeman | January 19, 2010
Posted February 11, 2010

Prices paid for soy oil in the United States can be influenced by things as diverse as Malaysian palm oil yield cycles, sea surface temperatures off the coast of Peru and China's decision to build dry stocks, said Anne Frick, a senior oilseed analyst for Prudential Bache Commodities LLC, at Wednesday's general session of the National Biodiesel Conference & Expo in Grapevine, Texas. "The largest domestic oil-soy bean oil-is probably the most influenced by the international situation," she said.

Factors that include a short-term soy price rally are EPA's characterization of soy methyl esters as an advanced biofuel, likely increase use of soy for biodiesel because of its ready availability. Add to that the fact that this is the second year consumption has outpaced production-largely because of population growth, increased income, increasing usage for industrial practices and falling vegetable oil stocks-and prices could firm.

Although there are record soy supplies in South America this spring, Brazil contains a huge land mass that presents a logistical nightmare. There's a two lane dirt road to the northern port and trucks are often lined up for miles waiting to load ships at the southern port, Frick said. "Just because those soybeans are there, it doesn't mean they'll get to market. [Also], China is taking many more beans from the U.S. this year, and it's depleted our supply. Supplies will be at their lowest in several years."

International forces that could push the market into a prolonged bearish cycle involve the fact that because soybeans are a meal-seed-60 percent of the value and 80 percent of the content comes from meal-demand derives mostly from the poultry and hog industries. Poultry output will be up this calendar year, but pork and cattle slaughters are likely to decline corresponding with slowed feed demand. In addition, meals eaten in restaurants are down, along with lard's usage as a baking and frying oil after continued efforts to eliminate trans fat from diets.

Heavy competition from other oils could also put downward pressure on soybean prices. "Palm oil dominates world trade," Frick said. Malaysia has its land pretty much planted and depends on yield increases to expand production volume. Indonesia, however, continues to expand its palm business on new acres. Volumes will continue to grow but at a modest rate.

An interesting aside-Malaysia and the U.S. have continued to negotiate a "nagging" free-trade agreement that began in 2006 under the Bush Administration. While it looks stalled, if this agreement were finalized Malaysia would obviously increase imports of its palm oil to the U.S., enjoying duty-free entry.

The most recent bull market for soy culminated with a 71 cents per pound surge in 2008, and then experienced a crash. About every 30 years soybeans reach a record high, after which they trade in a new and permanently higher price range. "I think that's probably going to be the case this time around as well," Frick said.

For now, prices have stagnated but the market may experience another rally before entering the bearish phase of the cycle.
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