What is the Deal with Soybean Meal?
Apr 12, 2016
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In the last few days soybean meal has been sharply higher lending support to soybean prices as well. Some of this strength is coming from the unwinding of long soybean oil - short soybean meal spreads as large speculators lift bullish bets on soybean oil. But, is there something else driving this strength and how long could it last?
Soybean oil has been in a bull market since early January as production issues with the Malaysian palm oil crop have shifted some demand over to soybean oil. Increased demand along with a slowing soybean crush has had a positive effect on soybean oil prices and soybeans as well. Speculative funds have been buying soybean oil and selling soybean meal. However, now that some think that the palm oil market has put in a high large speculators seem to be moving away from the soybean oil market and in the process buying soybean meal to lift spreads. This has helped soybean meal prices strengthen dramatically in the last few days.
This unwinding of long soybean oil and short soybean meal by the large speculators is probably not the only factor creating a spike in soybean meal prices however. With low soybean meal prices the soybean crush (process of making soybeans into soybean oil and meal) has slowed down dramatically from the record pace of last year. At the same time it seems that soybean meal demand has been strong at these lower prices both domestically and abroad. We will know more when we see the NOPA crush report on Friday, but the soybean meal market and the soybean/meal/oil relationship certainly act like there is tightness in soybean meal supplies.
If it is the case that soybean meal stocks are getting low compared to demand then this is somewhat reminiscent of early 2014 when soybean meal surged over $100 due to tight meal stocks. In the mean time soybean futures followed with an almost $2.80 cent rally of their own. To this point soybean meal has rallied a little of $30 (mostly in the last 3 trade sessions) and soybeans have rallied a little over $.80. This is encouraging for traders because many believe that sustainable soybean rallies should be led soybean meal not soybean oil. This is because soybean meal is the move valuable product of the soybean crush and when meal is strong there is more incentive to crush more soybeans and therefore more demand for soybeans.
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However, while there are some striking similarities to what happened in 2014 (the timing, the aggressiveness) there is also one stark difference. The move in 2014 was driven by the soybean crush falling to near 10 year lows due to lack of soybeans to crush. The soybean carryover from the previous year was only 92 million bushels which is well below what the USDA considers "pipeline" supplies. So, we were crushing less beans due to lack of supply rather than lack of demand. It took months to rebuild soybean stocks as the new crop of soybeans made its way into the hands of soybean crushers.
This situation is a little different than 2014 however. Meal prices had gotten so low that crushers started to slow down. We will know more about this on Friday's NOPA Crush Report, but so far this year the crush pace has been well of the pace of last year. In the mean time demand for soybean meal has remained strong despite estimates that it would slow down dramatically due to a more open Argentinean export program. And, while that has been some soybean meal moving from Argentina (with some Argentinean meal even making it's way to the US) export sales from the US have remained relatively strong, in part due to a weakening US$.
So, the slower crush pace this year is not for lack of soybeans to crush rather low crush margins have slowed down soybean crushers. So this time the question is not when will we have the soybeans to crush again but at what point is the crush margin good enough again to ramp up the crush. This may be a easier and quicker solution than 2014. Crush margins have already dramatically increased in the last few days and could already be encouraging soybean crushers to increase their pace. If that crush margin continues to get better this will give crushers more and more incentive and with a lot of soybeans available to be crushed it might not take nearly the strength in prices needed in 2014. This is not likely a price rationing event like in 2014, more of a margin improvement event.
This may mean that soybean producers should be looking at this recent strength in soybeans as a marketing opportunity for both old crop and new crop soybeans. While this rally in soybeans and meal may not be over just yet it might be a good idea to start scaling in sales at this point as prices are better then what many analysts thought possible even just a few weeks ago. For new crop soybeans we are looking at opportunities to replace bushels sold with call options in case we have a bigger weather issue this growing season and get a chance to add to our bottom line.
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Give us a call if you would like more info on the strategies we are using or if you would like to set up an account to put a plan in action. Ted Seifried - (312) 277-0113. Also, feel free to give me a call or shoot me an email if you would like to talk about your marketing plan, the markets, weather, or just to visit. Follow me on twitter @thetedspread if you like.
May Corn Daily chart:
May Soybeans Daily chart:
May Wheat Daily chart:
Producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!
Ted Seifried (312) 277-0113 or email@example.com
Additional charts, studies, and more of my commentary can be found at: http://markethead.com/2.0/free_trial.asp?ap=tseifrie
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