USDA cuts soybean export outlook, might spur speculation in Kernel

The USDA cut its soybean export outlook for 2011/12 by 1.8 mmt driven by dry weather in South America, the agency reported in its monthly yesterday. This is the fourth consecutive decrease after a 1.9 mmt cut in March, 2.9 mmt decline in February and 1.2 mmt in January.

Yegor Samusenko: The reduced availability of soybean, the largest oilseed globally by volume, has not been matched by growth in other oilseed supplies. This has pushed up global vegetable oil prices: soybean oil prices have grown 11% YTD and sunflower oil export prices from Ukraine are up 10% YTD (prior to yesterday’s USDA outlook news). We believe this situation could lead to speculation in Kernel (KER PW), the largest sunflower oil producer in Ukraine, but it does not change our fundamental view on the stock. The reason is that the company’s business model is focused on processing, implying inputs (oilseeds) are bought at the same time as it sells its product (sunflower oil), limiting the impact of commodity price volatility. Our analysis of the difference between the domestic sunflower oilseed and oil & meal prices shows that the processing business margin has not increased since the start of the year, when vegetable oil prices started growting again after several months on the decline. Furthermore, our calculation of the processing business margin shows that it is ~2 pp below on average since the start of the production season in September 2011 than for the same period a year earlier, in line with our projection that Kernel will earn a 1 pp yoy lower margin in its sunflower oil segment in FY2012. We keep our HOLD recommendation on Kernel shares with a target price of PLN 83/share.