Expect Higher Soybean Prices, Watch Interest Rate Prospects in Foreign Currency Markets
Prices for soybeans and soy oil are likely to continue rising amid tight supplies and greater demand. Meanwhile, in the foreign exchange markets, the U.S. dollar recently experienced a rebound, though interest rate prospects favor currencies such as the yen.
Soybean Futures
Soybean and soy oil prices have been rallying on increased use of biodiesel. U.S. biodiesel consumption has grown from 25 million gallons in 2004 to as much as 250 million last year. In Europe, rising use of biodiesel has led to higher demand for palm oil, which is used to make this alternative fuel. July palm oil, traded on the Malaysia Derivatives Exchange, reached 2393 ringgit or $703.93 a metric ton, the highest level since September 7, 1998. However, the jump in palm oil prices, especially in the past year, has prompted speculation that biodiesel producers may switch to soy oil.
Lower acreage has also boosted soybean prices, while recent warm weather favorable for crop planting has caused corn prices to drop. Corn futures prices, which rose 81 percent last year, have dropped 19 percent since reaching a 10-year high of $4.50 per bushel on February 26. With 91 million acres of corn expected to be sown and planting progress accelerating to normal or above-normal levels, I expect soybean plantings to be reduced by at least 15 percent this year. Pressure to use a larger portion of the corn crop for ethanol if gasoline prices continue to rise means that there is tremendous pressure to plant as much corn as quickly as possible, especially as yields are projected to be down this year.
In addition, expectations for tight supplies this season are very supportive to soybeans. The USDA's May 11 supply/demand report pegged 2007-08 ending stocks at 320 million bushels, below the average trade estimate of 366 million and below the 610 million seen in 2006-07. Total use is forecast at 3.039 billion bushels in 2007-08 compared to 3.032 billion in 2006-07. Exports are pegged at 1.808 billion bushels compared to 1.08 billion last year. The nearly 50 percent decline in soybean stocks and the increased usage will lead to a stocks-to-use ratio of 10.5 percent, down from over 20 percent in the previous year.
With reduced carryover, lower plantings and increased demand, soybean prices have been making highs. CBOT July soybean futures reached $7.76 per bushel, the highest since April 3. Soybeans had already rallied in previous months, with the November contract rising to a 32-month high of $8.07 on February 22.
Soy oil prices have rallied to contract highs on the USDA's forecasts for a decline in 2007-08 soy oil ending stocks to 2.179 billion pounds from 2.954 billion in 2006-07.
I recommend buying November soybean futures at $7.88 or better using a 20-cent protective stop. I look for November soybeans to rise to the $8.50 area.
Currency Futures
Interest rate hikes in the United Kingdom, hawkish statements from the European central bank, and the U.S. Federal Reserve's acknowledgement that the U.S. economy slowed are among the factors that have raised risk aversion. If risk aversion rises further, the U.S. dollar may extend its current rebound. However, interest rate expectations make European and Asian currencies more attractive investments.
The Fed chose to hold interest rates steady, noting that growth in the U.S. economy was slower in the first quarter this year. The economy is likely to expand in a very moderate pace. With core inflation somewhat elevated, the Fed's major concern is that inflation will fail to moderate. After the Fed meeting, the U.S. dollar traded higher.
I expect a corrective rally in the June U.S. dollar index futures to about 82.50, before prices level off and work their way lower. Support comes from speculation that the rate tightening cycle in Europe is nearing a peak. Additional support comes from the Bank of Japan's governor, who said that if expectations of low Japanese yields take hold, that could invite inefficient allocation of capital. These comments are considered hawkish and raise the risk of a near-term rate hike in Japan. Both these factors could be a catalyst for a correction of the carry trade, which would benefit the Japanese yen.
Though the dollar will be in a short-term corrective phase, interest rate differentials favor investment in European and Asian currencies, as the U.S. economy lags others in the world. The prospects of the Fed raising rates is very small, while the European Central Bank, the Bank of England and the Bank of Japan have a much greater chance of raising rates.
Action in the U.S. stock market could benefit the yen. A reversal of the carry trade allows the yen to appreciate more rapidly. A correction in the heavily overbought stock market could lead to an appreciation in the yen.
I recommend buying June yen futures at the 0.8320 level using an 80-point protective stop.
Stuart Kaufman is a Senior Market Strategist with Lind Plus. He can be reached at 800-924-1060 or via email at skaufman@lind-waldock.com.
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