Prices and Economic Indicators

AUGUST 1998 - PRICES & RATIOS: With significant supply expansion in U.S. new crop soybeans and corn coming soon, prices for soybeans, meal, oil and corn all registered above-normal declines in August. Except for oil, these prices show double digit percentage discounts from their respective 10-year averages. Above-normal soybean/corn price ratios triggered a 10 percent increase in 1997/98 global soybean plantings, topped only by a 13 percent increase in 1977/78. Although the soybean/corn price ratio continued above average through August, the ratio will likely fade in coming months. Below-normal prices for soybean meal and corn with improved feed profitability are boosting meal usage. In August, the soybean oil/meal price ratio was above its long-term average for its eighth consecutive month. We expect continued relative strength in oil prices next year because of dwindling oil stocks. Historically, the above average price phases of the last three cycles ranged between 15 and 30 months. The oil/meal price ratio may remain above normal until palm oil yields in Southeast Asia recover from the lagged effects of the drought.

In August, the index of prices received for all U.S. farm products was 1 percent below the previous month and 6 percent below a year earlier. However, annual percentage changes in August 1998 U.S. prices for selected commodities were mixed with palm oil, +29; broilers, +18; coconut oil, +12; soybean oil, +9; the CRB index, -14; corn, -24; soybeans, -26; wheat, -31; hogs, -34; and 48-percent soybean meal, -47.

August prices for most selected commodities were below their respective 12-month averages, except tropical oils. Indicators below their respective 12-month averages include: U.S. soybean crushing and exports; U.S. crush margins; the soybean/cotton price ratio; the wheat/corn price ratio; and Malaysian palm oil stocks. Indicators which exceed their respective 12-month trailing averages include: the U.S. broiler/feed price ratio; the U.S. hog/corn price ratio; U.S. feed profitability; the U.S. soybean/corn price ratio; U.S. soybean oil stocks; and soybean oil as a share of product value.

KEY DEVELOPMENTS

GLOBAL: Less favorable oilseed/grain price ratios will hold global expansion in oilseed area to 2.2 percent, compared with 4.3 percent last year. Generally favorable crop conditions and improved cultural practices benefited U.S. yields. However, yields abroad may dip 3 percent following last year's large 5.5 percent increase. The decline reflects floods in China, and projected declines to more normal levels in yet to be planted soybeans in Brazil and Argentina, following last year's above-trend levels. However, larger carry-in stocks will boost the global supplies 3.2 percent, or slightly above its 10-year average of 2.7 percent.

Slowing economic growth is expected to trim global meal usage expansion to 3.1 percent or just under its 10-year annual average of 3.3 percent, despite lower prices and improved feed profitability. However, if fish meal output recovers as expected, the global oilseed crush may expand only 2.5 percent.

Soybeans will account for 66 percent of global oilseed supply expansion, but only 45 percent of this season's increase in the global oilseed crush. The slower growth in the soybean crush reflects above-normal increases in sunflowers and rapeseed and expected recovery in fish meal output. Despite expanded crushing of sunflowers, rapeseed and peanuts, the global growth in 1998/99 seed oil output will be less than 1.8 million tons, compared with 2.4 million tons last year. Growth in soybean oil output alone will slow to 0.4 million tons, compared with nearly 2.1 million tons last year. Output of tree crop oils plus fish oil is forecast to recover 0.75 million tons, following last year's 0.2 million ton decline. However, global oil output will increase only 2.1 percent, or sharply less than its 10-year average of 4.1.

Key changes in global oil output include: (1) Southeast Asian vegetable oil output is forecast to recover by 0.4-million tons, following last year's 0.2-million ton drought driven decline; (3) India's oil output up 0.4 million tons following last year's 0.5 million-ton decline, largely reflecting larger rapeseed and peanut crops; (3) China's oil output down 0.2 million tons following last year's 0.6 million-ton increase, largely reflecting a smaller rapeseed crop; (4) the EU-15's oil output expansion is expected to slow to about 0.1 million tons, compared with nearly 1.0 million tons last year, reflecting reduced rapeseed yields and smaller sunflower area and (5) U.S. oil output expansion will slow to 0.1 million tons, following a last year's 1.1 million-ton increase, reflecting slower expansion in soybean supply, a reduced cottonseed supply and weak foreign demand.

In 1998/99, global vegetable oil supplies are forecast to expand by only 2.3 percent, or sharply less than the 4.3 percent average annual growth in global usage during the last decade. This will result in below-average expansion in vegetable oil output and disappearance and the third consecutive reduction in global oil stocks. Unless current forecast for tree crop oil output or global oilseed crush expansion is exceeded, global vegetable oil stocks will decline in 1998/99.

Despite a below-normal increase in 1998/99 global oilseed plantings and reduced yields abroad, U.S. oilseed ending stocks will increase sharply. The increase will reflect larger carry-in stocks in the U.S. and abroad, above trend soybean yields in the U.S. and slower income growth in many countries.

In 1998/99, global oilseed stocks will increase 28 percent following last year's 36 percent increase. Previously, global oilseed stocks registered similar gains in 1985 and 1986, up 36 percent and 26 percent, respectively. Because of weak meal demand, only 36 percent of the 9.7 million-ton increase in global oilseed supplies is expected to be used in 1998/99. Although U.S. oilseed supply expansion is forecast at 5.6 million tons, U.S. ending stocks of oilseeds are forecast to expand 7.5 million tons, largely reflecting reduced stocks abroad. Foreign oilseed ending stocks use coverage may drop 19 percent below its 10-year average in days of use. In contrast, U.S. soybean stocks may rise to 67 days of use, the highest since 1987 and 52 percent above its 10-year average.

UNITED STATES: In 1998, an above average increase in U.S. oilseed yields with larger carry-in stocks will boost U.S. oilseed supplies by 5.6 million tons and account for 58 percent of global oilseed supply expansion. U.S. oilseed supplies are estimated at 94 million tons or 30 percent of global supplies.

Barn breaking U.S. yields will bring lower prices, boost feed profitability and expand meal usage in the U.S. and abroad. However, a recovery in Asian demand would help. Each year, the world has another 79 million people to feed. More than 90 percent of that increase comes in countries that use more oilseeds and products than they can produce.

U.S. crop conditions as of Sept 6 showed 63 percent of the soybeans and 34 percent of the cotton were in good to excellent condition, respectively, compared with 60 percent for both a year earlier. U.S. crop progress as of Sept. 6 for both soybeans and cotton was a bit ahead of last year. Thus U.S. soybean yields should exceed last year, while cottonseed yields will drop. During the 1965-97 period, the September U.S. soybean production estimates averaged 0.7 percent under the final estimate. However, during the same period, excluding years when U.S. soybean yields were below the trend, the September yield estimate averaged 2.0 percent less than the final yield estimate.

U.S. soybean disappearance in the 12-months ending August 1998 registered an above normal increase, reflecting a large expansion in U.S. Oilseed supplies and low beginning stocks abroad. During the same 12 months U.S. soybean exports dipped slightly while exports of meal and oil rose sharply. This reflected growth in U.S. crush capacity and a double digit increase in foreign oilseed exports which left little or no growth in competing exports of products.

In 1998/99, the U.S. soybean crush plus exports will expand at a below-average pace, reflecting larger carry-in stocks on Oct. 1 in Brazil and Argentina and slower income growth in many countries. However, U.S. exports may register a larger than normal seasonal flow in the second half of 1998/99 after South American supplies are depleted.

FOREIGN SECTOR: A 4.2 million-ton recovery in 1998/99 foreign oilseed carry-in stocks will result in only a 4.1 million-ton increase in foreign oilseed supplies because of reduced yields and below normal expansion in area. Despite slowing usage expansion, foreign oilseed ending stocks use coverage is expected to drop 8 percent, or 19 percent below its 10-year average.

SOUTH AMERICA: Although the 1999 South American oilseed harvest is expected to drop 3.2 million tons, stocks in these countries on Oct. 1, 1998 will be 4.6 million tons above last year and 1.9 million tons above its 4-year average. Abundant old-crop South American oilseed supplies and depressed margins will limit U.S. oilseed exports in the first half of 1998/99. How will this impact South American soybean imports? During Oct-Jun 1997/98 U.S. soybean exports to South America shot up to 1.5 million tons, compared with 0.58 million tons during the same months a year earlier. Even with a drop in South Americans' upcoming oilseed supplies, their imports of U.S. soybean exports could fall short of the 1997/98 volume, if foreign demand expansion continues weak.

A 5 percent cut in 1999 South American oilseed production will not prevent a sizable boost in net exports of vegetable oil from these countries during their 1999/00 local marketing years. The bulk of the increase will be sunflower and fish oil. However, during Oct-Sept 1998/99 South American soybean oil exports are expected to be about flat, following an estimated 0.3 million increase in 1997/98. To maintain last year's oil and meal export pace and cover growing domestic usage, South America must boost its crush. That will force a significant reduction in soybean exports and trim their carry-out. Thus 1998/99 foreign oilseed exports may decline following double digit gains in the past two years.

CHINA: With continued emphasis on grain production, China's oilseed area dropped slightly from last year to a level more than 5 percent below 1995. Floods in some areas cut China's oilseed output nearly 7 percent or 2.9 million tons less than last year. Reduced indigenous supplies will cut the crush and result in reduced meal and oil output, despite a large increase in oilseed imports. The reduction in indigenous supplies and continued income growth will boost China's net imports of oilseeds, meals and oils by 0.98, 0.50 and 0.37 million tons, respectively.

SLOW RECOVERY IN SOUTHEAST ASIA OIL SUPPLIES: Combined supplies of vegetable oil in Malaysia and Indonesia and the Philippines is forecast to recover only 0.2 million tons in 1998/99 following an estimated 0.1 million-ton decline, reflecting the lagged effects of below normal rainfall. During the four years ending 1996/97, combined growth in oil supplies and net exports from these countries averaged 1.31 million tons per year and 0.74 million tons, respectively. Even if oil usage expansion in these countries slows to only 0.1 million tons, the currently forecast net export expansion of 0.2 million tons will force ending stock use coverage in these countries to its 1994 low of 22 days. Annual changes in vegetable oil indigenous supplies and net exports are as follows in million metric tons:

However, it should be noted that indigenous supplies of lauric acid oils in the three countries above will decline reflecting the lagged effects of below normal rainfall in the Philippines. This could deplete lauric oil stock use coverage in the exporting countries to only 18 days of total use, the lowest in more than a decade.

OIL IMPORTS MIXED IN KEY OIL DEFICIT COUNTRIES: With growing usage the key oil deficit countries will continue to expand their net imports in 1998/99. China's net imports of vegetable oils will continue to grow, reflecting reduced indigenous supplies and rising incomes. However, moderating usage growth will slow the expansion in net imports. In the EU-15, slowing rapeseed oil output expansion is expected to boost net imports of vegetable oil to more than 1.0 million tons, or 0.3 million tons above the year earlier estimate.

Annual changes in total oil use and net imports for key importing countries million metric tons are:

OIL STOCKS: Global oil ending stocks are projected at 29 days of use, the lowest in more than a decade and 27 percent below its 10-year average of 39 days. In contrast, U.S. ending stocks of vegetable oils are forecast to increase slightly to 34 days of total use, or 23 percent below its 10-year average. With tight supplies abroad, U.S. oil exports should continue a near record pace in 1998/99.

MARKET PERSPECTIVE IN AUGUST

Changes in August 1998 U.S. prices for key commodities with average monthly changes during August 1987/88-1996/97 are as follows in percent:

UNCERTAIN INCOME GROWTH: In May, the International Monetary Fund published its World Economic Outlook which showed 1999 global real income growth recovering to 3.7 percent, compared with 3.1 percent in 1998. Since then, economic conditions in some Pacific Rim countries and the FSU have weakened. In July, Consensus Forecasts published in the Economist indicate 1999 global income growth may fall to 2.7 percent or slightly below the Economic Research Service forecast of 2.8 percent. If 1999 world income growth slows to 2.7 percent that would be 26 percent below its five-year average and the lowest since 1993 using the Consensus Forecasts. Although the rate of income growth in China is expected to slow to 6.0 percent that is more the growth rate in the industrialized countries. Furthermore, China with 1.24 billion people and growing by 10 million each year is estimated to use only 9.0 kilos of vegetable oil per person per year, or 31 percent below the world average. There is still much room for U.S. export growth in China.

August 1998 cash prices for selected U.S. commodities with their respective 10-year monthly ranges and averages are as follows:

August 1998 prices for U.S. soybeans and soybean meal exceeded their respective 10-year averages, as did the price ratios for soybeans/corn and soybean meal/corn. However, corn and soybean oil are now bargains priced at or below their respective 10-year averages.

US 1998/99 price forecast midpoints for selected commodities with a year earlier comparisons are as follows.

What are the Implications of the above price changes? (1) Reduced soybean/grain price ratios will slow the expansion in Southern Hemisphere oilseed plantings in late 1998, but 1999 U.S. soybean plantings may increase reflecting the high soybean/corn loan price ratio. (2) Lower feed ingredient prices will improve feed profitability and boost livestock product output. (3) Lower meal/grain price ratios could boost meal feeding rates. (4) Despite lower prices: (a) U.S. export sales of 1998 crop soybeans through September 3, were 4.7 million tons, compared with 7.8 MMT a year earlier; (b) On the same date, U.S. export sales of 1998 crop soybean meal were 1.0 MMT, compared with 1.7 MMT a year earlier. (5) U.S. soybean oil prices are expected to remain above their 10-year average, but also competitively priced in relation to other oils. (6) The expected strength in vegetable oil prices is supported by indications of a reduction in foreign vegetable oil stocks which could make our prices more competitive in world markets in coming months.

KEY POINTS

** With the approach of a record large U.S. 1998 crop soybean harvest, global customers will have an opportunity to cover their needs at bargain prices.

** The 1998/99 seasonal pattern of U.S. exports will be skewed by sharply larger carry in stocks abroad, with some reduction in South American oilseed production anticipated in early 1999.

** Seasonal price patterns will also be skewed as a record large U.S. harvest soon begins. Meal demand should pick up steam as feed profitability improves in coming months.

** Oil prices, which are strong in relation to meal, should remain strong in coming months. Factors to watch: (1) unexpected changes in palm oil output in Malaysia and Indonesia; (2) the magnitude and timing of Chinese oil purchases; (3) upcoming oilseed plantings and yields in South America; and (4) the 1998 crop soybean oil extraction rate.

** Below-normal 1998/99 expansion in global oilseed output could be repeated in 1999/00, if some oilseed prices are less favorable in relation to competing crops.

** Looking beyond 1998/99, it will be difficult to maintain the past growth trend in global oilseed output without continued expansion in area. During the 10-years ending 1997, global oilseed output increased 36 percent, while global oilseed area increased 31 percent. However, the recent years' acceleration in U.S. yields may provide a needed assist to maintaining the past growth trend.

** Unexpected changes in prices and/or income growth in many countries could cause foreign oil and meal usage expansion to deviate from our current forecasts of 3.2 percent and 3.3 percent, respectively. During the past decade, annual growth in foreign meal and oil usage averaged 4.5 an 3.3 percent, respectively. In contrast U.S. oil and meal usage expansion rates are pegged at 1.6 and 2.2 percent, respectively, compared with annual averages of 3.1 and 3.3 percent during the last decade.

** If 1998/99 global oil and meal usage growth rates exceed their respective below average rates of 3.0 and 3.1 percent approaching their 10-year averages of 4.3 percent and 3.3 percent, the recovery in global oilseed stocks would fall short of the current forecast, prices for soybeans and meal would exceed the current forecasts and the oil/meal price ratio would strengthen.

** Projected 1998/99 per capita vegetable oil disappearance in China and India at 9.1 and 7.9 kilos, respectively, are both trending upward, but remain far below the estimated world average of 13.3 kilos. In 1998/99, global per capita vegetable oil use is expected to increase to 36.4 grams per day, or slightly above its long-term trend. Global per capita oil usage has been trending upward by 1.9 percent per year.

Alan Holz PH (202) 720-0143

FAX (202) 720-7670

Last modified: Tuesday, September 14, 2004