Seasonal issues may keep soybean prices under pressure

Commencement of harvesting in US has helped bring in some respite to the soaring International soybean prices, which touched record high levels in the last week. The upside rally in the international prices, which commenced from November 2011 till April 2012 was largely due to soybean crop concerns in other two major producing countries, Brazil and Argentina. Dry weather conditions in the US, the largest soybean producing country, led to heightened worries over the supplies of this oil crop in last few months. Prices of Soy bean hit record highs in International as well as in our domestic markets.

India, although having a miniscule share of around 4 percent in global Soybean production, still is the second largest consumer and importer of edible oil, after China.  Our consumption of around 17-18 million tonnes is not met through domestic production, hence rely extensively on imports to fill this production consumption gap. We therefore import around 50-55 percent of our consumption. Palm oil holds a lion’s share of around 75-78 percent in total edible oil imports with soy oil import at about 12 percent.
 
Fundamentals vis-a-vis Price performance
Domestic oilseeds prices have risen significantly during the period November 2011 to April 2012 on back of lower Rabi oilseeds output which were expected to fall by around 10 percent, apart from the firmness in international Soybean prices. At Indian Commodities Exchanges too, prices of Soybean futures witnessed gains of around 65-67 percent in tandem with spot prices.

However, gains in edible oil prices were comparatively much lower due to smooth supplies of palm oil from Malaysia and Indonesia (two largest palm oil producing countries). Palm oil futures at Bursa Malaysia Derivative Exchange also surged 18 percent during the same period. Taking cues from the International price trend and rupee depreciation, spot refine soy oil prices in domestic surged around 22 percent while in futures prices were up around 24-25 percent. It is pertinent to note that domestic prices have a high correlation with international price trends. In case of Soybean, correlation between CBOT and NCDEX future price is to the tune of 0.90 in the last one year. For Soy bean oil, correlation of spot and future prices in domestic markets is almost 0.98 in the last one year and same holds true for last 2-3 months too.

With some stability in prices gaining ground in May this year, Soybean witnessed yet another rally starting June with markets closely watching fundamentals for the new crop season in both domestic and international scenario. Slow advancement of monsoon in our country with 29% below average rains during first month of this year’s monsoon season led to a sharp drop in area under oilseeds cultivation. Soybean acreage was down by 19 percent till 12th July, 2012 versus same period last year. Unfavorable reports from USDA with respect to downgrading of US crop conditions during the period added fuel to an uptrend. In the third week of July 2012, prices touched new highs in the domestic markets.

With Madhya Pradesh, the soybean bowl of India, started witnessing normal rains, sowing of the crop progressed in full swing resulting to a 4 percent increase in area under cultivation at 106.7 lakh hectares as on 24th August 2012. Reports of rains in the US Midwest since the beginning of August also helped to calm sentiments globally. Added to this, seasonally high yield period of Malaysian palm oil and higher stocks eased high price concerns. All these developments exerted downside pressure on domestic soybean prices in the last one month.

Outlook
Going forward and considering current IMD’s forecast of normal rains in the month of September coupled with higher acreage now, soybean output may increase in 2012-13 season that would commence in October 2012. Arrivals of new crop which shall commence from September end, is expected to keep the prices under check. Harvesting season in the US shall also exert downside pressure on Soybean in International markets, leading to a spill over effect on domestic prices.

Seasonality pattern reveals that Soybean prices generally decline during the harvesting period and bottom out during the peak arrival period in October. However, sharp downside this season during the peak arrival period may be restricted due to tight supplies of oilseeds globally. Soybean November futures, which is currently trading around Rs 3710 per qtl, may consolidate in the range of Rs 3625 and Rs 3830 per qtl levels in the near term, while, during the peak arrival period (October), prices might touch Rs 3500 per qtl levels.

November onwards, market may take cues from the sowing progress of Soybean in Brazil and Argentina and the output estimates thereon. On the domestic front, prices may also be determined by the sowing progress of Rabi oilseeds which is expected to increase next season amid lucrative returns earned by the farmers.

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