Prices and Economic Indicators

November 1998

PRICE SUMMARY: In November, U.S. farm prices for soybeans, meal and corn registered above-normal seasonal increases from sharply below average levels, while soybean oil prices failed to register a normal gain from its above-average level. The soybean/corn ratio increased from its above average level, but the soybean oil/meal price ratio slumped. At bargain levels, meal gained on corn and cash soybeans gained on November soybean futures. Crush margins and the hog/corn price ratio dropped.

DRIVING FORCES (1) Low prices are helping meal use in the EU-15, but global meal will not accelerate reflecting depressed hog prices in the United States and economic problems in some Asian countries. (2) The expected cut in global oil stocks emanates from slow growth in tropical oil output resulting from the lagged effects of below normal rainfall. (3) The November global oilseed output, crush, and ending stock forecasts are about unchanged from last month with upward revisions in the net-exporting countries about offsetting downward revisions in net-importing countries. (4) Upward revisions in global oilseed and product export forecasts will fill the gap in the importing countries. (5) Upward revisions in soybean and product exports from Argentina and Brazil will curb U.S. soybean disappearance and further boost U.S. ending stocks. (6) The world financial complex is still under strain, but a number of key market countries have recently cut interest rates and Brazil supported by the IMF, will implement a recovery plan. (7) Although the international financial crisis isn't over, recent developments bode well for improving economic growth and global oilseed product usage expansion. (8) Preliminary year-to-date estimates indicate that U.S. soybean disappearance is lagging the year earlier volume, reflecting reduced soybean exports, although the crush remains strong. (9) The lag in U.S. soybean exports is a function of increased competition, rather than shrinking demand. (10) Below normal vegetable oil output expansion abroad, with expanding usage are holding U.S. vegetable oil exports at above normal levels. (11) U.S. oil exports will continue strong, despite above average prices, as long as U.S. prices remain competitive in foreign markets.

KEY PRICE SHIFTS Annual percentage changes in November U.S. prices for selected commodities are as follows: 48% soy meal -41; corn -23; cash soybeans -10; all U.S. farm products -7; soybean oil -2; combined livestock and products, -1; coconut oil +19; and palm oil +26. Most selected commodity prices in November 1998 were below their respective 12-month averages, except tropical oils.

INDICATOR SHIFTS: Indicators that exceeded their respective 12-month trailing averages in November include: the U.S. soybean/corn price ratio; U.S. soybean exports; the U.S. soybean crush; the U.S. wheat/corn price ratio; the broiler/feed price ratio; and the oil share of U.S. product soybean value. Conversely, indicators lagging their respective 12-month trailing averages include: U.S. soybean crush margins; the U.S. hog/corn price ratio; the U.S. meal/corn price ratio; the soybean/cotton price ratio; and U.S. soybean oil stocks; and Malaysian palm oil stocks.

HISTORICAL PERSPECTIVE November 1998 prices with comparisons follow:

Key changes in November 1998 prices for selected commodities with comparisons during the 10-years ending 1997/98 are as follows in percent:

Possible implications of the above changes include: (1) Improved soybean/corn price ratios along with dry weather are boosting 1998 Southern Hemisphere oilseed plantings. (2) Lower grain prices should boost feed profitability and this could stimulate livestock output unless livestock and product prices deteriorate further. (3) Lower meal/grain price ratios may also benefit meal feeding rates. (4) Higher oil prices reflect a decline in global oil stocks from a year earlier, but this will not prevent above average U.S. soybean oil exports if foreign oil usage recovers as expected. (5) The soybean oil/meal price ratio, which registered an above normal drop in November should strengthen in coming months, reflecting indications of a further reduction in ending stocks of oil abroad.

FOREIGN OILSEED SUPPLIES Expectations of more normal yields compared with a year earlier will wipe most of the gain from a 3.7 percent increase in foreign oilseed area. However, indigenous foreign oilseed supplies are forecast to increase 5.7 million tons, chiefly because of larger soybean stocks in Brazil and Argentina on Oct. 1, 1998. After last year's 11.6 million ton increase, 1998/99 foreign oilseed supplies may register a below average increase of 2.7 percent. However, if foreign oilseed yields remain unchanged from last year's above-trend level, foreign oilseed supplies could increase by 11.3 million tons, or 5.3 percent. The 1998 South American oilseed crop yields will remain uncertain until March 1998. Currently South American oilseed output is forecast at 60.0 million tons or 2.2 million less than last year. The South American oilseed crush is expected to continue to expand, but oilseed exports and stocks are expected to decline.

U.S. OILSEED SUPPLIES Although output was up less than 1 percent from last year reflecting slightly higher yields, U.S. beginning stocks of oilseeds recovered 39 percent from last year. This boosted the U.S. oilseed supply increase by 2.4 million tons compared with 7.3 million tons last year. In 1998/99, growth in U.S. oilseed supplies is expected to account for 29 percent of the expansion in global oilseed supplies.

GLOBAL OILSEED US AGE Although global oilseed supplies are up 2.7 percent, usage expansion is placed at only 1.8 percent, reflecting weak real income growth in some Asian countries with oil demand driving the crush. With an above-normal increase in U.S. oilseed supplies and a below-normal increase in foreign oilseed supplies, why do U.S. exports plus export sales continue to lag?

U.S. TRADE U.S. oilseed exports are expected to drop 0.9 million tons from last year's 24.4 million tons, reflecting a 4.6 million-ton increase in South American soybean stocks on Oct. 1, 1998 and weak demand in some Asian countries. We expect a pickup in U.S. oilseed exports in the second half, particularly if the 1998 South American oilseed harvest drops by 2.2 million tons, following last year's 12.5-million ton increase. The current U.S. oilseed export forecast assumes that foreign oilseed ending stocks are drawn down by 1.4 million tons or nearly 9 percent.

Besides the 4 percent drop in U.S. oilseed exports, U.S. meal exports could drop by 10 percent, following last year's 32 percent gain, reflecting increased competition from South America and some Asian demand weakness.

Although U.S. vegetable oil exports could drop 7 percent following last year's large increase, the fundamentals remain favorable with: (1) Increased U.S. soybean supplies; (2) little or no growth in exportable supplies of non-lauric acid oils from Southeast Asia; (3) continued expansion in China's oil imports; and (4) reduced vegetable oil ending stock/use coverage abroad.

U.S. oilseed and product export value, excluding corn gluten feed and meal, is forecast at $9.35 billion, or 16 percent below FY-98, largely reflecting a 13 percent drop in export unit values. During the past decade, annual changes in U.S. oilseed and product exports ranged between +31 percent in FY-95 and -13 percent in FY-89. If dry weather in South America trims yields below our estimates, U.S. oilseed and product exports could benefit.

OILSEED STOCKS U.S. soybean ending stocks are expected to recover to 50 days of total use, compared with 28 days of use a year earlier and exceed its 10-year average by 13 percent. In contrast, foreign oilseed ending stock/use coverage is forecast to drop to 23 days of use, or 21 percent below its 10-year average.

PRICE IMPLICATIONS Above-normal supply expansion and weak exports will boost U.S. soybean stocks sharply above last year. This is expected to hold prices in the range of 15 percent below last year's $237 per metric ton weighted average price. Since ending stock use coverage is projected to be significantly above its 10-year average, soybean prices will likely continue significantly below the 10-year weighted average of $227 per ton. The current USDA soybean price forecast midpoint is $200 per ton.

U.S. MEAL DISAPPEARANCE In 1998/99 U.S. oilseed meal usage is expected to increase 2.2 percent, or somewhat below its 10-year annual average growth of 3.3 percent, reflecting depressed hog prices. With the November 1998 hog/corn ratio at only 9.9:1.0, the lowest since 1971, liquidation seems eminent. The next Hog and Pig report will be released on Dec. 29. Although broiler/feed price ratios remain favorable, expansion flexibility is limited by the fact that most birds are gown under contract.

FOREIGN MEAL DISAPPEARANCE Expansion in total meal use abroad is expected to accelerate from last year, slightly exceeding its 3.3 percent 10-year annual average growth rate. Despite lower meal prices, below-average expansion in foreign oilseed supplies and slowing income growth may curb livestock output in some Asian countries. However, meal usage in China, the EU-15, Mexico, and South America should register significant gains while meal usage in Eastern Europe and Taiwan recover somewhat.

VEGETABLE OIL DISAPPEARANCE Expansion in U.S. vegetable oil domestic disappearance will slow sharply following last year's above-normal increase, while foreign oil disappearance recovers from last year's sharply below-average growth. Foreign oil usage (beginning stocks plus output minus ending stocks) will exceed output by 0.7 million tons so stocks will decline and/or U.S. oil exports could benefit.

GLOBAL PER CAPITA VEGETABLE OIL USE TREND World vegetable oil use (beginning stocks plus production minus ending stocks) is forecast at 13.3 kilos per capita or slightly above its long-term trend. If global per capita use continues its long-term upward trend, it would approximate 15.9 kilos in the year 2010. Based on current global population projection of 6.86 billion and per capita usage trends, the world will need about 109.4 million tons of vegetable oil in the year 2010.

VEGETABLE OIL STOCK/USE COVERAGE U.S. vegetable oil stocks are forecast at 34 days of total use, compared with 32 days last year. Thus, U.S. oil stocks will be 23 percent below its 10-year average of 44 days. Foreign vegetable oil ending stock/use coverage is projected to shrink 9 percent to only 29 days of use or 24 percent below its 10-year average of 38 days. Global ending oil stocks are expected to cover only 30 days of use, compared with 33 days a year earlier, or 24 percent below its 10-year average. Unless global vegetable oil output significantly exceed our forecasts, or oil demand falls below expectations, global vegetable oil stocks will likely continue below normal. Thus, prices for most vegetable oils will continue significantly above their respective 10-year averages in coming months.

SOUTHEAST ASIA SOFT OIL SUPPLIES Total "soft oil" (non-lauric acid oil) supplies in Malaysia, Indonesia and the Philippines, at 15.6 million tons, may recover only 0.5 million tons from last year and remain 0.5 million tons below 1996/97. Combined ending stocks of soft oils in these three countries is forecast at only 986,000 tons, or 25 days of total disappearance. Growing domestic use and below normal beginning stocks will shrink the net-export expansion to less than 0.2 million tons compared with annual average growth of more than 0.5 million tons during the last five years. Palm oil price changes may be geared to changes in seasonal output and Chinese imports.

CHINA'S VEGETABLE OIL IMPORTS China's net imports of vegetable oil registered phenomenal growth from 0.9 million tons in 1992/93 to 3.3 million tons in 1997/98. Oil import expansion in China is now being driven by reduced output of indigenous oils, six to 7 percent income growth and relatively low per capita use. China's net imports of vegetable oil are forecast at 3.5 million tons, up 0.2 million tons from last year.

INDIA'S VEGETABLE OIL IMPORTS India's vegetable oil imports will exceed 2.0 million tons reflecting downward revisions in peanut, rapeseed and soybean output. India's 1998/99 vegetable oil imports will be 6 percent more than last year and more than seven times the 1993/94 volume. The upward trend in India's oil imports in being driven by income growth and relatively low per capita use, despite indigenous output expansion.

US SOYBEAN DISAPPEARANCE During Sept-Nov U.S. soybean disappearance (crush plus exports) accounted for 28.8 percent of the current season forecast. During the last decade, the U.S. soybean disappearance during Sept-Nov averaged 26.6 percent of complete season and ranged between 24.3 percent in 1990 and 30.9 percent in 1997. During Sep-Nov 1998, the large increases in South American stocks trimmed U.S. soybean disappearance by 8 percent. However, if 1999 South American oilseed production declines as expected and foreign demand forecasts are on track, U.S. soybean disappearance during Dec-Aug 1998/99 will increase from a year ago.

SOYBEAN PRICES In mid-November, the U.S. producer price for soybeans was down 21 percent from a year earlier, but 5 percent above the previous month. During the last decade, November U.S. soybean prices averaged 1.3 percent less than the complete season weighted average price, but 13.2 percent under the average annual monthly peak. Although the November 1998 price was 12 percent below its 10-year average, it is just under the midpoint of the current USDA price forecast. Using season to-date prices and the projected recovery in ending stock/use coverage, U.S. soybean prices are expected to be in the range of 15 percent less than last year. In 1998/99, soybean prices will not repeat last year's counter-seasonal price action.

CORN PRICES In mid-November, U.S. producer prices gained 2 percent from the previous month, but remained 23 percent below a year earlier. Despite some recovery, the November price was 18 percent under its 10-year average for that month. During the past decade, November prices averaged 4.8 percent under its complete season weighted average and ranged between 11.9 percent under in 1994 and 0.4 percent over in 1997. In November, the corn price was 3.0 percent below the midpoint of the current USDA 1998/99 MY price forecast.

SOYBEAN/CORN PRICE RATIO In November, the U.S. soybean/corn price ratio recovered 3 percent from the previous month and 12 percent above last March to 2.80:1. The recent ratio was 7 percent above its 10-year average for that month while oilseed plantings in the four major South American countries, now in process, is estimated at 28.0 million hectares, compared with 27.7 million hectares last year. However, in March 1998 the ratio was neutral at its 10-year average, but 12 percent below a year earlier. In 1998, U.S. oilseed area was unchanged from 1997 at 35.5 million hectares. If relative prices for new crop soybeans remain above average, 1999 U.S. oilseed plantings will continue large. However, tight availability of small grain acres and crop rotation rigidity may limit changes in 1999 U.S. soybean plantings.

SOYBEAN MEAL PRICES November U.S. 48-percent soybean meal prices rose 6 percent from the previous month, but remain a bargain at 41 percent under a year ago. The recent soybean meal price was just under the midpoint of the current USDA 1998/99 price forecast and 31 percent below its 10-year average for that month. During the past decade, November soybean meal prices averaged 1.7 percent over the season average price, but on an annual basis November prices ranged between 32.2 percent over the 1997/98 average to 13.5 percent under the 1995/96 average.

SOYBEAN MEAL/CORN PRICE RATIO In November, U.S. 48-percent soybean meal/corn price ratio at 2.08:1 was 24 percent under a year earlier and 15 percent under its 10-year average for that month. Despite a lower meal/corn price ratio, sharp deterioration in the hog/corn ratio is expected to curb the growth in U.S. livestock output. The November meal/corn price ratios averaged 8 percent over its 10-year average and ranged between 7 percent under in 1996/97 and 17 percent over in 1994/95.

PALM OIL PRICES Because of a 36 percent drop in Malaysia's November 1, 1998 palm oil stocks, f.o.b. prices for refined-bleached-deodorized (RBD) palm oil rose 26 percent from a year ago. In November 1998, Malaysian palm oil was priced 18 percent over Decatur soybean oil price, compared with 8 percent under a year earlier, reflecting sharply reduced stocks in Malaysia. Until global vegetable oil stocks recover to normal levels, prices for both oils will remain strong in coming months.

SOYBEAN OIL PRICES In November, U.S. soybean oil prices were flat from October at 2 percent under a year earlier. During the past decade, the November soybean oil price averaged about 2 percent under its annual average and ranged between 12 percent under in 1989/90 and 8 percent over in 1994/95. The November 1998 oil price is 4 percent below the midpoint of the current USDA soybean oil price forecast. However, reduced oil stocks abroad could strengthen oil exports and pull prices to higher levels. Assuming that foreign oil use expands 4.7 percent, ending stocks of oil abroad could dip to only 29 days of use, or 24 percent below its 10-year average.

U.S. OIL/MEAL PRICE RATIO In November, the U.S. soybean oil/48 percent meal price ratio dipped 6 percent from the previous month to 3.49:1.0, but remained 54 percent above its 10-year average for that month and 66 percent above a year earlier. During the last decade, this ratio has ranged between 1.54:1 in August 1989 and 3.90:1 in December 1994. Our current forecasts indicate that the oil/meal price ratio will continue sharply above average in coming months. The soybean oil/meal price ratio is in a long-term upward trend. Key influences include: (1) slow meal usage growth in the EU-15 and the FSU-12 have restricted the crush and oil output; (2) slowing palm oil expansion in Malaysia; and (3) income driven vegetable oil usage expansion in China and India is exceeding indigenous output and boosting imports.

U.S. FEED PROFITABILITY The November feed profitability index was unchanged from a month earlier and 28 percent above a year earlier. The recovery in feed profitability reflected lower feed ingredient prices in the face of relatively strong livestock and product prices. However, in the swine sector, the November 1998 hog/corn ratio dropped below 9.9/1.0, or 45 percent below a year earlier and the lowest since 1971. Increased concentration in swine production and environmental regulation concerns have dampened the normal production cycle. However, the poor profit outlook may cause some liquidation in coming months. In contrast, the November 1998 broiler/ feed price ratio was 83 percent above a year earlier and 58 percent above its 10-year average. Despite sharply improved margins, U.S. broiler output is expected to expand by only 4.7 percent in 1998/99, since most birds are grown under contract.

CRUSH MARGINS Oilseed crush margins have been sharply depressed during the past year, despite continued growth in global supplies. The pinch in margins may reflect increased capacity, lower capacity utilization rates, and below-normal growth in the global crush, reflecting economic problems in some Asian countries. In November, the U.S. soybean crush margin was 64 percent below a year earlier and 47 percent below its 10-year average. In contrast, November farm prices for soybeans were 21 percent below a year earlier and only 13 percent below its 10-year average. Therefore, crush margins now account for a reduced share of soybean product value.

Alan Holz PH (202) 720-0143; FAX (202 720-7670

Last modified: Tuesday, September 14, 2004