• The USDA (US Department of Agriculture) has released the Prospective Planting Report and Stock Estimates for 2020F. The reports had a marginally positive impact on US soybean and soybean oil prices.
• US soybean price for May rose to US$8.86/bushel from US$8.8225/bushel while US soybean oil price increased to US$0.2701/pound from US$0.2687/pound. Based on current prices, the discount between CPO and soybean oil is 4% or US$24/tonne vs. the five-year estimated average of 19.3% and three-year average of 17.8%.
• US farmers are expected to plant more corn in 2020F. The farmers are anticipated to plant about 97mil acres of corn in 2020F compared with 83.5mil acres of soybean. We believe that US farmers are planting more corn due to corn’s attractive returns compared with soybeans.

• Comparing 2020F against 2019 however, the size of soybean and corn planted areas in the US is expected to increase. Areas planted with soybeans are envisaged to rise by 9.7% to 83.5mil acres in 2020F from 76.1mil acres in 2019. Areas planted with corn are anticipated to expand by 8.1% to 97mil acres in 2020F from 89.7mil acres in 2019.

• Although US farmers are planning to plant more corn, we believe that soybean supply would rise in the US in 2020F due to the increase in the size of soybean plantings. This may exert downward pressure on soybean prices. The silver lining is that demand may improve as China has resumed purchases of US soybeans. According to the Grains Stocks Report, US soybean stockpiles stood at 2,253mil bushels as at 1 March 2020 vs. 2,727mil bushels as at 1 March 2019.

• Incidentally in Malaysia, the Malaysian Palm Oil Association and Malaysian Estate Owners’ Association has appealed to the Sabah government to re-open harvesting and milling operations in the state. The Sabah state government has extended the suspension of palm oil operations in the major palm oil areas to 14 April, in line with the country’s extended movement control order.

• The three-week suspension in palm oil operations is expected to affect the FFB production of the plantation companies by roughly 0.5% to 4%. As mentioned in a previous report, the company with the highest exposure to Sabah is IOI Corporation. About 68.9% of IOI’s oil palm estates are in Sabah.

• We estimate that Sime Darby Plantation’s FFB production may be affected by less than 1% as most of the group’s estates are in Indonesian and Papua New Guinea. We estimate that 4% of IOI’s FFB production may be affected by the three-week suspension in plantation operations. Currently, we are assuming that IOI’s FFB production would inch down by 0.2% in FY20F due to the replanting of 11,000ha of ageing oil palm trees.

• We maintain Underweight on the plantation sector.

Source: AmInvest Research - 1 Apr 2020