Thai Vegetable Oil

Thai Vegetable Oil Plc (TVO) 

 

Investment thesis

We regard the USDA report of slightly tighter global ending soybean stocks in March and the stronger Brazilian real (BRL) against the USD as short-term positives for a stronger global soybean price in the recent two weeks (from US$8.5/bushel to US$9/bushel). The overall picture of the global soybean demand/supply balance has not fundamentally changed. We continue to expect record world soybean stocks for the second straight year in 2015/16, led by US stocks’ nine-year highs. Good rainfall caused by the strong El Niño that will last through June will produce good yields for the Argentinian harvest April-May. We believe that it is too early to call La Niña yet and expect the soybean price to stay at US$8-10/bushel through 3Q16 in anticipation of new large Argentina and Brazil supply. Our HOLD rating on TVO stands. 

Decline of global soybean stock-to-use ratio in March 

Based on the USDA supply/demand update for soybean in March, the US soybean ending stocks for 2015/16 are projected at 460m bushels, up 10m from February 2016, due to lower crush (revised down by 10m in March). Hence, the US stock-to-use ratio continued to rise to 12.5% in March (up from 12.2% in Feb). Brazilian soybean output remained the same at 100m tonnes and its ending stocks were 1m MoM lower in March (to 18.3m) due to increased soybean exports. Argentinian production was also the same at 58.5m and its ending stocks were 1.15m MoM lower in March (to 28.65m) due to a higher crush. 

Global soybean ending stocks in March came in at 78.87m tonnes, down 1.55m from Feb, led by Chinese import demand that increased by 1.5m tonnes. Hence, the global stock-to-use ratio lowered to 25% in March (down from 25.6% in Feb), which was positive for the tighter global soybean demand and supply balance and higher global soybean prices. Despite lower global soybean stock-to-use ratio in March, we think that it will have little effect in changing the overall picture of the record world soybean stocks for the second straight year. 

Too early to call La Niña effect   

Based on International Research Institute for Climate and Society (IRI) at Columbia University data, the strong El Niño effect will last until June 2016 before subsiding from July until October. The IRI predicts the strong probability of the El Niño effect eventuating at 97-99% in Feb-March 2016 before reducing to 74% in April, 40% in May, 19% in June and 10-12% during Aug-Oct 2016. 

Although it is too early to call the La Niña due to the prevailing high uncertainty, the above forecasts hint the increasing probability of La Niña by YE16, which implies below average rainfalls in southern Brazil and Argentina and could have a negative impact on soybean yields during the Brazilian and Argentinian plantings of Oct-Dec 2016 and their yields during the harvest season of Mar-May 2017. We believe that it is too early to call the La Niña as of now. In the meantime, the strong El Niño will continue to bring in good rains in Feb in Argentina, which implies another year of high yields.