Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Cents per Bushel Rsper Quintal Cents per pound Rs per 10kg Seasonal Outlook: Soybean Ankita Parekh Research Analyst ankita.parekh@nirmalbang.com The world market is staring at a huge soybean crop for the year 2014-15. It would be ideal to first reminisce of what the global soybean market witnessed in the year 2013-14. In the soybean world market, price movements were largely affected by two primary factors since the start of the planting season in 2013-14 till 2014-15. One, the unfavourable weather conditions during the planting season of 2013-14 crop which reduced the yields significantly in the US, South America as well as India. This had a significant impact on soybean prices during the first half of the crop year 2013-14. While the second factor which snatched the game away from the bulls in the latter half of the year were the growing concerns over the expected mounting supply in 2014-15 from U.S, the largest soybean producer in the World. As we progressed towards the planting season of 2014-15, soybean prices on the CBOT plummeted below the three year low and then other nations followed the suit. In the spot markets of India, soybean prices which were trading at Rs 4000 per quintal during the beginning of third quarter have fallen by over 17 percent to Rs 3300 per quintal till now. Apart from this, the other major event witnessed in the trade was the tough stance taken by China on a widely used U.S Dried Distillers Grains (DDG) on concerns that the shipments may contain a genetic modification that Beijing hasn't approved. This resulted in a sharp fall in prices of DDGs which had its impact on the soy meal prices as well. Since both of them are protein rich, livestock feeders substitute soy meal with DDGs, pressurising the soyameal prices in the world market. The oil industry also remained under pressure as stocks around the world remained high while a glut like scenario emerged for palm in Malaysia and Indonesia. Lower global prices had attracted larger imports to India in the recent times. While some defaults in palm shipments were noted in China as palm oil prices on the Bursa and Malaysia fell to five year low. Price History Soybean Soya Oil/ Palm Oil 1800 1600 1400 1200 1000 800 CBOT NCDEX (RHS) 5000 4500 4000 3500 3000 2500 50 45 40 35 30 25 CBOT NCDEX (RHS) 800 750 700 650 600 550 500 Source: Reuters 1
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 June June June June July July July July Aug Aug Aug Aug Sept Sept '000 hectares Good to Excellent % Seasonal Outlook: Soybean U.S. U.S. is the not only the largest producer of soybean in the world but also the largest exporter of soybean. Despite the higher acreage in U.S last year, soybean production was hurt due to the excessive heat. In 2013-14, the market had witnessed continuous drop in soybean good to excellent crop condition rating as the sweltering heat baked the standing crops due to lack of rains. Post the harvesting, we saw soybean prices rising during the first quarter of 2014 on the back of surge in soy meal exports. With the Argentina s currency dwindling versus the US dollar, farmers started hoarding soybean as a hedge against the inflation. As result of which export demand shifted to the US. This prevented the inventory from recovering from the drought depleted levels of 2012-13. Prices began its downward journey after hitting the psychological $15 mark in June 14 till date to below $10. The sentiments changed to bearish with the planting intentions report released by the United States of Agriculture Department which showed record planting of soybean for the year 2014-15. This was later supported by crop friendly weather throughout the season which is now yielding record production of the oilseed for the 2014-15. U.S. Soybean Acreage Good to Excellent Crop Condition 35000 30000 25000 20000 85 75 65 55 45 35 25 10 year range 2014 2013 Source: USDA, NB Research The adjoining table shows the soybean acreage in the US over the last few years. Planted area for the year 2014-15 is at a record high at 84.8 million hectares, up by approximately 11 percent on a year on year basis. Record high planted acreage is estimated in Michigan, Minnesota, Nebraska, New York, North Dakota, Ohio, Pennsylvania, South Dakota, and Wisconsin. Two consecutive years of bad weather during the planting season had affected the yields and production of the oilseed despite an increase in acreage. This year the weather has remained suitable throughout the planting season apart from some concerns over dry weather during the pod 2
filling stage and later some frost concerns emerging in South Dakota and neighbouring states. However, these concerns were not very big and had minimal impact on the crop and thereby on the prices. The second chart above depicts the soybean crop condition released by the United States of Agriculture Department. It shows that the percentage crop in good to excellent condition in the year 2014-15 has been the highest in a decade. Till date, about 72% of the crop is rated in good to excellent condition as compared to 52% at the same time last year. Particulars (Million Tons) 2012-13 2013-14(E) 2014-15 (F) Beginning Stocks 4.6 3.83 3.81 Production 82.56 89.51 103.42 Imports 0.98 2.31 0.4 Total Supply 88.14 95.65 107.63 Exports 35.91 44.08 45.59 Crush 45.96 46.95 47.76 Feed waste for domestic consumption 2.44 0.81 2.74 Total Domestic consumption 48.4 47.76 50.5 Total Usage 84.31 91.84 96.09 Ending stocks 3.83 3.81 11.54 Source: USDA Supply And Demand Scenario U.S soybean farmers will bring in by far the largest harvest ever in this year. Conducive weather during the planting season has boosted yields across the nation with many states likely to produce record yields. The yield is now estimated at 46.6 bushels per acre beating the previous record of 44 bushels per acre in 2009. As result of which production for the year 2014-15 is likely to be 103.42 million tons, rising by almost 15 percent from the previous year. In 2013-14, imports from South America to U.S grew owing to the domestic shortage. Higher export demand and lower availability in the domestic markets had encouraged higher imports from South America as result of which we saw imports rising to 2.3 million tons in 2013-14 as compared to 0.98 in 2012-13. Imports for the year 2014-15 are likely to be less than half a million owing ample domestic supplies expected. The total marketable surplus for 2014-15 stands at 107.63 million tons compared to 95.65 million tons in 2013-14. Many meteorologists are opining of a more severe winter in the U.S this year as well which will increase meal demand from the livestock sector. Therefore we can expect a rise in domestic consumption for the second consecutive year. 3
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14(E) 2014-15 (F) Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Million Tons FOB ($/MT) Seasonal Outlook: Soybean The crucial factor which can bridge the large gap between demand and supply is exports. How much incremental demand for exports can we expect in the year 2014-15 is a big question to address. The kind of growth in exports we have seen in 2013-14, it is unlikely that the year ahead would see that kind of a growth in demand. As per the latest estimates, export demand is likely to rise to 45.59 million tons in 2014-15 from 44.08 million tons. The growth in 2014-15 is miniscule 3.5 percent on a year on year basis compared to 22 percent in 2013-14. Production versus Stock Scenario Soybean Export Prices Production 120.00 100.00 80.00 60.00 40.00 20.00 0.00 Ending stocks (RHS) (MMT) 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 650 600 550 500 450 400 350 Brazil Parangua Argentina US Gulf Source: USDA, Reuters Lower soybean export prices have prompted heightened export demand in the month of July 14 and are visible in new crop sale commitments. Lower prices may attract demand for soybean and soy meal in the short term. The long term scenario is however not very attractive as acreage is also expected to rise in Brazil which may further drop soybean prices and could lead to cancellations of forward orders. Demand from China in 2014-15 is not likely to grow at the pace at which it grew in 2013-14. Total imports to China are likely to be 68 million tons in 2013-14 and is expected to rise to 72 million tons in the year 2014-15. However, concerns over the demand from China emerge after the nation s economy stalls. Depressed housing sector has had a cascading impact on China s infrastructure spending. Apart from this, currently soybean crushers in China are suffering a loss of about 400 Yuan in crushing one ton of soybean. Considering all these aspects, we believe that the factor i.e. Imports from China which could have led CBOT soybean prices higher this year can see a temporary slowdown in the coming quarter. Therefore, despite the expected rise in demand on a year on year basis, supply will continue to remain in excess which will be reflected in the higher ending stocks. Ending stocks for 2014-15 is projected to be 11.54 million tons, a whopping 200 percent rise from 2013-14 s 3.81 million tons. 4
INDIA The year 2013-14 has not been a promising year for the soybean market and its participants in India. The year started with heavy rains during the pod filling stage which reduced yields dramatically leading to a surge in soybean prices. This made the Indian meal dearer in the world market as a result of which Indian meal demand slackened. The consequence was such that Indian meal exports plummeted. Many plants were forced to shut operations and many are running at lower crushing capacity as plant owners were inculcating losses. The planting season witnessed many hiccups as weather played a truant at the start of the season. Indian monsoon arrived almost a month late which left farmers with a very small sowing window. As a result of which there was an acreage loss this year. This was later followed by a period of dry patch and then excessive moist and humid conditions which caused concerns over the standing crop. Fortunately, weather God s showed some mercy and conditions turned favorable for a good crop growth. ACREAGE As per the latest updates, the total acreage under soybean stands at 110.31 lakh hectares. This is down by almost 12% compared to 122.19 lakh hectares sown in the year 2013-14. Although, the acreage in 2014-15 stands above the five year average of 95.70 lakh hectares. Looking at the state wise breakup, Madhya Pradesh which is the largest producing state has witnessed a drop in acreage from 63.80 to 55.46 in 2014-15. Maharashtra which is the second largest producing state have witnessed a fall too from 39.05 lakh hectares to 38.10 lakh hectares in 2014-15. The area under soybean gathered pace towards the end of July 14 as monsoon picked up pace and covered the major growing regions. This helped farmers to recover some of the acreage loss. Rajasthan and other small states have also witnessed acreage loss this year. It will be crucial to analyze the acreage and yields expectations from Madhya Pradesh which contributes about 55 percent of the total soybean crop. The whole of Madhya Pradesh is divided into major growing belts which are a set of minor districts collectively namely, Ujjain belt, Bhopal belt, Indore belt, Hosangabad belt, Jabalpur belt, Sagar belt and Gwalior belt. 5
Among all the districts covered, most of the regions have witnessed a drop in acreage owing to the late sowing as monsoon in these regions was delayed by over a month. This has prompted many farmers to shift to crops like moong, urad and rice which they found more lucrative in terms of pricing. The Indore belt specially had faced problems of seed germination which had forced farmers for resowing of the seed. Such problems were also recorded in other growing belts. Farmers had shown agitation as they had purchased expensive seeds this year as compared to the previous year and then faced such problems. Many farmers had also faced problems of their crops being infested by worms. However extensive use of pesticides has kept the problems under control, not letting it affect the yields significantly. Talking about the yields, post sowing the weather remained largely in favor of the crop. Spells of rain during the growth and pod filling stage has helped significantly for a good crop growth. The yield this year is expected to be 15-17 bags of 90 kgs each from one hectare compared to 8-12 bags last year. Higher yields this year will result in higher production despite a reduced acreage. The worst affected region this year is the Gwalior belt where there was an extensive delay in monsoon and then it was also followed by lower rainfall throughout the crop season. This has affected the yields and thereby will lead to reduced production from this region. However, to achieve the above said yields fully, rainfall in the next few days is very crucial especially in the Malwa belt as weather has now become very sunny which may dry the soybean plant. Acreage Picture Showing Worm Damage States (Lakh HA) 2013 2014 Madhya Pradesh 63.8 55.46 Maharashtra 39.05 38.1 Rajasthan 10.59 8.21 Karnataka 2.51 2.92 Telengana 2.84 2.71 Chattisgarh 1.58 1.47 Gujarat 0.92 0.74 Others 0.9 0.69 Source: SEA Source: NB Research 6
Supply Demand Scenario Particulars (Lakh Tons) 2012-13 2013-14(E) 2014-15(F) Supply Side Opening Stock 0.5 3.6 5.1 Production 108 90 104 Retained by farmers 10 10 10 Marketable Surplus 98.5 83.6 99.1 Consumption Side Arrivals so far 95.65 80 Crushing so far 91.5 77 Crops yet to arrive 2.85 3.6 Stocks with plants 0.78 1.5 Closing Stocks 3.63 5.1 Source: Private Sources, NB Research The above table illustrates the supply and demand scenario of soybean in India for 2012-13, 2013-14 and forecasted supply side of 2014-15. As discussed earlier the year 2013-14 has not been an encouraging year for the soybean market participants. Right from the start of the supply chain i.e. the farmers till the end users i.e. soybean crushers have suffered. The 2013-14 started with an opening stock of 3.6 lakh tons compared to 0.5 lakh tons in 2012-13. Heavy rains causing flood during the pod filling stage reduced production to 90 lakh tons despite higher acreage compared to the previous year 2012-13. As a result of which the total marketable supply fell to 83.6 lakh tons in 2013-14 compared to 98.5 in 2012-13. The sharp fall in production and poor seed quality stoked fears of shortage in the beginning of the crop season which made price go through the roof. Processors scrambled for good seed quality as export demand for the first quarter of the season remained supportive. Prices surged to as high as Rs 5000 per quintal in spot market as crushers paid fancy premiums for good variant of the seed. This consequently made Indian meal prices dearer in the world market. Free on Board soy meal prices surged to as high as $700 per ton from $500 at the start of the season. This had a catastrophic effect on the Indian meal exports. Indian meal export plunged to levels never seen in the last many years. 7
Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Tons Tons Seasonal Outlook: Soybean The adjoining charts show how the meal prices rose and the aftermath suffered by the meal exporters as exports slumped. Total exports during the period Oct- Aug stood at 2,018,663 tons in 2014-15 compared to 3,317,670 tons during the same period in 2012-13, slumping by almost 40%. Exports started to fall after the month of April 14 in which 89,883 tons of soy meal was exported. Post which exports during May- August 14 plunged to 8226 tons, 2637 tons, 6635 tons, and 2778 tons respectively in each month. What kept the Indian crushing plants going was the sharp rise in domestic demand. Domestic consumption was driven by higher meal demand from the poultry and livestock sector as well as higher awareness among the mass regarding protein and its importance which has resulted in increased crushing for soy flour. Therefore we have seen a pickup in domestic demand which has marginally offset the sharp fall in exports. We are likely to end the year 2013-14 with a carryover stock of approximately 5 lakh tons versus 3. 6 lakh tons in the 2012-13 Going forward in the year 2014-15, we are likely to begin the year with a higher carryover stocks and expected 10-15 percent rise in production. This means we would be looking at a higher supply side in the coming year. Prices both in cash and future markets have fallen in anticipation of a rise in production coupled with poor meal demand. The Indian meal book still remains heavily undersold despite prices being so low. As of today, Indian soy meal export book stands at approximately 2.5-3 lakh tons compared to approximately 8 lakh tons last year. Therefore, slow demand and higher production expectation remains a concerning factor. Indian Soymeal Exports and Its Price Soymeal Export Trend in India 500000 400000 300000 200000 100000 0 Exports Prices ($/FOB/Ton) 750 700 650 600 550 500 450 Five year Avg 2013-14 2012-13 1000000 800000 600000 400000 200000 0 Source: SEA, NB Research 8
Conclusion After looking at the supply and demand scenario in the U.S and India, one must also note that soybean acreage in Brazil is also set to rise. The early plantings in western Parana have started to emerged and it is believed that an early start would go to favor an even bigger increase in soybean acreage than anticipated with higher yields if weather remains friendly. Estimates by the state agencies in Mato Grosso, Parana and Rio Grande do Sul, which are the top three soybean producing states in Brazil, indicate that the soybean acreage in each state will increase 4.3%, 3.0% and 2.8% respectively. With this it is estimated that production from Brazil will be near 95 million tons in 2014/15 compared to 86.7 million tons in 2013/14. Forward sales have been slow this year and only 10% of 2014/15 crop in Mato Grosso has been forward contracted compared to 38% last year. This could be due to farmers expecting the Brazilian currency to weaken versus dollar; exporters would gain later as the oilseed is priced in dollars. As far as Argentina is concerned, cost of production of soybean is cheaper than cost or production in corn. With kind of inflation they have, it is expected that world will see added acres to soybean from Argentina as well. Demand from China, the largest consumer of soybean remains a concerns atleast for the coming quarter due to sluggish Chinese economy. In India, the scenario at the start of the year 2014-15 is higher supply plus lower demand versus lower supply plus higher demand during the same time last year. Indian soybean demand will largely depend on how the nation bags the export demand throughout the year. India is competing with nations like US and Brazil even in destinations like Vietnam and Indonesia which were primary buyers of Indian meal. So, in order to remain competent in the world market throughout the year, Indian soybean prices cannot rise alone. The only comforting factor for demand is the rise in domestic consumption. The oil market is also heavy in terms of supply owing to rising production and stockpiles in Malaysia and Indonesia and the big soybean crop from the U.S. The recent tax sops given by Malaysia and Indonesia to curb their stockpiles and promote exports has attracted large imports of palm oil to India at cheaper prices during its peak consumption period. India imported 13.3 lakh tons of vegetable oil in the month of August 14, the largest ever since 1994. The delay in implementing the B5 biodiesel mandate in Malaysia due to the delay in construction of 15 blending facilities is also one of the causes why the excess supply could not be absorbed. 9
Looking at the immediate short term scenario, certain pockets of Madhya Pradesh which were late sown are awaiting for one spell of rain for yields to magnify from the current expected levels. The spot markets in India will remain shut in the coming week due to the festivals of Navratri, Dushera and Id. This would limit the arrivals in the spot market adding some cushion to prices which are at lower levels presently. Post which we expect harvesting to gather pace and arrivals from all the states will start post the festival of Diwali. Farmers would like to encash their produce before the start of the Rabi sowing season. Pressure from higher arrivals in the spot markets as well as the U.S. cannot be overruled. Therefore, after we analyze the supply and demand scenario of the five majors, namely US, Brazil, Argentina, China and India we clearly see that world supply shall over ride the demand in the year 2014-15. We opine that any short term pullback in November soybean contract traded on NCDEX towards Rs 3100 is unlikely to sustain and prices should drift lower to Rs 2700 per quintal in the short term. 10
RESEARCH TEAM Name Designation E-mail Kunal Shah Research Head kunal.shah@nirmalbang.com Devidas Rajadhikary Sr. Technical Analyst devidas.rajadhikary@nirmalbang.com Harshal Mehta Sr. Technical Analyst harshal.mehta@nirmalbang.com Mohammed Azeem Technical Analyst mohammed.gaziani@nirmalbang.com Ankita Parekh Research Analyst ankita.parekh@nirmalbang.com Somya Dixit Research Analyst somya.dixit@nirmalbang.com Ravi D'souza Research Associate ravi.dsouza@nirmalbang.com Sakina Mandsaurwala Research Associate sakina.mandsaurwala@nirmalbang.com Ishwar Kelwadkar Research Associate ishwar.kelwadkar@nirmalbang.com Disclaimer: This Document has been prepared by N.B. Commodity Research (A Division of Nirmal Bang Commodities Pvt. Ltd). The information, analysis and estimates contained herein are based on N.B. Commodities Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents N.B. Commodities Research opinion and is meant for general information only. N.B. Commodities Research, its directors, officers or employees shall not in any way be responsible for the contents stated herein. N.B. Commodities Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. N.B. Commodities Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. N.B. Commodities Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. Address: Nirmal Bang Commodities Pvt. Ltd., B2, 301 / 302, 3rd Floor, Marathon Innova, Opp. Peninsula Corporate Park, Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013, India 11