USDA’s prospective planting report indicated that US farmers intend to plant 91m acres of soybean (+4.3% from 2021’s planted acreage) and 89.5m acres of corn (- 4.1% from 2021’s planted acreage), possibly due to skyrocketing fertiliser prices, which have resulted in farmers sacrificing corn for soybean. While the prospective planting report does not necessarily translate to actual acreage, the latest prospective planting report is bearish on near-term soybean price, as it eases concerns on soybean supply. The bearish near-term soybean price sentiment will also have a spill over effect on near term CPO price, given the tight supply-demand balance for vegetable oil. Maintain 2022-24 CPO price projections of RM4,300/3,300/3,300 per tonne, and OVERWEIGHT stance on the sector. Top picks remain FGV (BUY; TP: RM2.43); IOI Corp (BUY; TP: RM5.09), KLK (BUY; TP: RM32.43) and Sime Darby Plantation (BUY; TP: RM5.95).

USDA 2022 prospective planting: More soybean; less corn. USDA’s 2022 prospective planting report indicated that US farmers intend to plant 91m acres of soybean (+4.3% from 2021’s planted acreage) and 89.5m acres of corn (-4.1% from 2021’s planted acreage), possibly due to skyrocketing fertiliser prices (which have resulted in farmers sacrificing corn for soybean). Should the intended planting acreage turns into reality, this would be the third time in history soybean acreage intentions eclipsed corn. The first time was in 1983, when US government urged farmers to plant less corn in a bid to lift crop prices. The second time happened in 2018, as former President Donald Trump’s trade war with China dented export sales.

Knee-jerk negative impact on CPO price. While the prospective planting report is merely an indication of US farmers’ planting intention (and it does not necessarily translate to actual acreage for the next marketing year, if history is a guide), the latest report is bearish on near-term soybean price, as it eases concerns on soybean supply. The bearish near-term soybean price sentiment will also have a spill over effect on near term CPO price, given the tight supply-demand balance for vegetable oil.

Forecast. YTD, CPO price averaged at RM6,160/mt, which is significantly higher than our projected CPO price of RM4,300/mt for 2022. While we believe CPO prices will likely surpass our 2022-24 CPO price projections of RM4,300/3,300/3,300 per tonne, we make no changes on our CPO price projections for now, given the fluid situation. Based on our estimates, every RM100/mt raise in our CPO price projection will lift earnings forecasts for plantation stocks under our coverage by 3.5-15.0%.

Maintain OVERWEIGHT. We reiterate our OVERWEIGHT stance on the sector, underpinned by (i) high near term CPO prices (which will in turn translate to good near term earnings prospects), (ii) easing ESG concerns, and (iii) decent valuations. Top picks remain FGV (BUY; TP: RM2.43); IOI Corp (BUY; TP: RM5.09), KLK (BUY; TP: RM32.43) and Sime Darby Plantation (BUY; TP: RM5.95).

Source: Hong Leong Investment Bank Research - 4 Apr 2022