In its latest World Agricultural Supply and Demand  Estimates (WASDE) report, USDA unexpectedly cuts its US soybean production estimate by 5% to 88.60m mt or 3% below the consensus forecast of 91.36m mt mainly on lower harvested area and yield estimates. In our view, this may be caused by crop planting delays in the US this season as soybean planting success rate and its final yield are very sensitive to timing and weather issues. By itself,  the news of the lower than expected US soybean production should be positive to CPO prices. Insufficient soybean will lead to low soybean oil supply globally and this will increase demand for palm oil, which is commonly used as a substitute. Locally, palm oil export jumped 18.5% in first 10 days of August and this should also be positive to CPO prices as well. Despite our bullishness on CPO prices, we believe that current share prices for big cap planters are already reflecting  valuation of CPO prices at RM2700/mt for 2014. Hence, we reiterate our NEUTRAL rating on the sector. No change in our CY13-CY14 average CPO price forecasts of RM2,500/mt-RM2,700/mt at this juncture. We have OUTPERFORM calls on IJMP (TP: RM3.50) and TSH (TP: RM2.57). We also keep our MARKET PERFORM ratings on SIME (TP: RM9.80), IOICORP (TP: RM5.40), KLK (TP: RM21.86), PPB (TP: RM15.20), FGV (TP: RM4.60), GENP (TP: RM9.85), and UMCCA (TP: RM7.55). However, we are still keeping UNDERPERFORM on TA ANN (TP: RM3.55) due to high costs issue.

USDA unexpectedly cut its US soybean production estimate by 5% to 88.60m mt or 3% below the consensus forecast of 91.36m mt. As a result, the global soybean production was also reduced by 1.5% to 281.72m mt from July-13 estimate of 285.89m mt. Accordingly, USDA has revised down its 2013/14 season global soybean inventory estimate by 1.5% to 281.72m mt.

Late soybean planting in US this season may have caused lower yield. We gather that USDA has reduced its US soybean production due to lower harvested area and yield estimates. In our view, this may be caused by crop planting delays in the US this season as soybean planting success rate and its final yield are very sensitive to timing and weather issues.

Overall impact is positive to CPO prices. By itself, the news of the lower than expected US soybean production should be positive to CPO prices. Insufficient soybean will lead to low soybean oil supply globally and this will increase  demand for palm oil, which is commonly used as soybean oil substitute. As it is, the soybean oil price has surged 2.1% to 42.75 US cents per pound on the CBOT market overnight. Despite the hike, soybean oil prices may have more upside as it is still trading below USDA estimate of 44 to 48 US cents per pound.

Locally, palm oil export jumped 18.5% in first 10 days of August. On the other hand, the latest data release by Intertek has shown a significant improvement in Malaysia palm oil exports. We believe the surge in demand could be caused by the return of China demand for palm oil due to stock up activity ahead of Mid-Autumn festival (which falls on 19 Sep this year). While we are expecting August improvement in exports, we wish to highlight that the first 10-day data is usually not representative on the quantum of the exports growth as we only expect a single-digit export growth. Still, the better demand should be positive to CPO prices as the overall demand outlook has improved.

Maintain NEUTRAL on Plantations as we believe big caps valuations are already pricing in the recovery. We are positive on CPO prices in 2H13 and hence we maintain our 2013 forecast of RM2500 at this juncture. Despite our bullishness on CPO prices, we believe that current share prices for big cap planters are already reflecting valuation of CPO prices at RM2700/mt for 2014, which is similar to our forecast for 2014. Nevertheless, we believe attractive valuations can be found in mid cap planters with high FFB growth potential. Hence, we continue to like IJMPLANT (OP; TP: RM3.50) and TSH (OP; TP: RM2.57).

Source: Kenanga