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Corn+Soybean Digest

Asian Slump To Last At Least Two Years

Don't look for significant improvements in the seriously eroded Pacific Rim corn and soybean market anytime soon.

Fact is, it will take at least six months for the least-affected countries to stabilize their economies, and probably a lot longer for the most depressed countries.

A few experts believe conditions may get worse before they get better in some countries.

The upshot is, unless a major weather problem hits China, it will be at least two years and possibly as many as five years before we see grain imports in the Pacific Rim anywhere near what they've been the past two years.

And, with increasing competition in oilseed and feed-grain production around the world, affected countries may not return to the U.S. for the volume of corn and soybeans they previously bought.

Bob Wisner, an Iowa State University extension ag economist, points out that U.S. exports and outstanding unshipped sales from Sept. 1, 1997, through March 26, 1998, were down 24% from what he calls "disappointing exports" the previous year.

Because roughly half of U.S. ag exports (including corn, wheat, soybeans, beef and pork) end up in the Pacific Rim, Mark Holder, a Chicago Board of Trade economist, expects weak demand there to weigh down U.S. commodity prices for some time.

For example, Korean imports of U.S. corn are down more than two-thirds from the previous year's level, says Susan Keith, senior director of public policy for the National Corn Growers Association.

"In 1997, Korea was our third- largest corn customer and in 1996 it was our second-largest customer," says Keith. "It's been a serious loss for us."

The Asian economic downturn also affected Thailand, Malaysia, Indonesia, Philippines, Burma, and to a lesser extent, Taiwan and Japan. China, too, appears to be rethinking corn use plans within the country and may become a bigger exporter than had been expected earlier.

After a trip to Japan, where he visited grain users and importers, Wisner believes that exporting to the Pacific Rim region could get tougher. One reason: Livestock and poultry cutbacks in nearly all Asian countries will free up some grain and vegetable oils for export. Increased imports from South America and Europe are another factor.

"A major Japanese corn buyer said his firm has purchased corn from Hungary and Romania for the first time and that the quality was excellent and the price was below that of corn purchased from the U.S.," Wisner reports.

The buyer also told Wisner that new-crop Argentine corn is less expensive than U.S. corn, and he has been bringing in barley and rye from Canada for feed.

Darrel Good, extension economist at the University of Illinois, says U.S. export credits have helped in moving some corn to South Korea.

The latest numbers show corn sales to the Pacific Rim are 7 million tons (11%) below 1997 levels. In dollars, that's $1.2 billion.

Most experts agree that corn prices will be hit hardest by the Asian situation. Good says a big U.S. crop this year will add more downward pressure.

"Troublesome weather this summer could reverse sliding corn prices, but that could cause different problems for corn producers," he comments.

The demand picture isn't quite as bearish for soybeans as for soybean meal and corn, due to the relatively strong worldwide demand for vegetable oils, including soybean oil.

With increased supplies available from South America, though, soybean prices currently are down about 30% from last year's highs of over $9/bu, and meal prices are already down 45%. Just since last summer, soybean oil has advanced from near 28% of the combined value of soybean oil and meal to over 45%.

It could easily exceed 50% of the total product value in the next 6-12 months, predicts David Keefe, a vice president at Prudential Securities Inc., Chicago.

"It's unusual that oil is responsible for such a large share of the combined product value," says Keefe.

Indonesia is partly responsible for this increased demand for soybean oil. Its national currency fell heavily (70-80%) against the U.S. dollar in the initial months of the economic crisis. With the high worldwide demand for vegetable oils, there was incentive to export palm oil to earn U.S. dollars, which were needed to pay off some of the country's dollar-denominated loans.

The high volume of palm oil going into the export market drove up domestic prices. On top of that, it was feared that an El Nino-induced drought in Indonesia would result in domestic oil shortages and even higher prices.

In response to both these pressures, the Indonesian government banned further palm oil exports.

Malaysia, the largest palm oil producer in the area, saw its 1997-98 oil production cut about 6% by drought. While this has helped strengthen soybean oil prices, it now appears Malaysian and Indonesian production has recovered and experts expect ample supplies and more stable prices for this year.

Assuming supplies materialize, the Indonesian ban on palm oil exports will be lifted soon.

For just 1998, it appears that the Asian crisis, when totaled up, will cost U.S. crop and livestock producers, processors and exporters about $2.1 billion.

While it will take time for exports to Pacific Rim countries to come back, Wisner says long-term prospects are quite positive.

"Severely depressed exchange rates will make industrial products from several countries in the region very competitive in western Europe and the U.S.," he says. "This should help the Asian economy work out of its current problems."

Wisner and others believe Asia's developing economies still represent a growth market for U.S. ag exports.

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