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The meal market has seen an impressive rally off of the December lows, but demand indicators continue to weaken, and without significant help from the South America weather, the short term trend looks to turn lower. We still cannot rule out the potential for supply tightness to support the market, but Brazil’s weather is looking better. The area that has reportedly been too dry appears much smaller than the region that has received good rains. Futhermore, a shift in the pattern in Argentina could go a long way in helping their crop recover. Keep in mind that Argentine producers are sitting on a large supply of soybeans. With normal weather, meal prices look too high on the world market. Talk of fund buying, optimism on the world economic conditions and inflationary expectations may have already been priced into March meal’s 30% rally off of its December lows.
Commercial hatcheries in the US set 203 million eggs into incubators for the week ending December 27th, which was down 7% from the previous year. In the last 15 weeks, this data has been down 5-12% from 2007 levels, and this is likely to tighten the broiler supply for much of the next 3 months. This should cause a significant decline in meal demand in the months just ahead. Keep in mind that the USDA has pegged domestic meal demand for the 2008/09 season at 32.5 million tonnes, down only 1.97% from last year, but January-March consumption could be down 6-7% from last year. For weekly export sales report last week, net sales of meal came in at just 43,300 tonnes, all for the current marketing year. Cumulative sales stand at just 40.7% of the USDA forecast for 2008/09 versus a 5 year average of 47.6. Sales need to average 113,000 tonnes each week to reach the USDA forecast.
The soybean market remains historically high-priced up near $10.00, but there appears to be plenty of optimism for higher prices ahead due to 1) ideas that prices are cheap after the break from a July peak of 1653 1/2 for March soybeans and 2) ideas that inflation will pick up steam this year after the massive stimulus programs initiated by governments around the world.
China remains an aggressive buyer of soybeans on the world market. The USDA announced a sale of 232,000 tonnes late last week, and China has confirmed that it will release up to 150,000 tonnes of government-owned soyoil prior to the Lunar New Year on January 26th. Sources report that China started buying soyoil from South America to start replacing the oil it will sell. Imported oil is substantially cheaper than domestic supplies in China. This has sparked a strong rally in soybeans and oil, but meal has lagged.
If soybean plantings for the coming season reach 79 million acres (up 3.1 million from 2008), yield comes in near the trendline of 42 bu/acre and consumption holds steady with last year, ending stocks for 2009/10 would come in around 540 million bushels, up from 205 million for 2008/09. The stocks/usage ratio would jump to 18.5% from 7.0%!
With more talk of another sharp drop in cotton plantings, soybeans trading over $10.00 on the spot market and corn demand uncertainties, the prospect of a shift to more soybean production this season could help limit the upside for meal prices over the near term.
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