Todd's Take

28 Sep 2016

By Todd Hultman
DTN Analyst

While corn and soybean prices languish under the weight of this fall's anticipated record harvests, there has been one grain-related contract that has traded higher the past eight weeks. Not only is January soybean oil up 8% since the end of July, but spot soybean oil is within two cents of its highest price in two years. A weekly spot close above 35 cents, if it happened, would mark a significant bullish change in the long-term trend.

How has soybean oil become so popular while the rest of the grain complex struggled the past two months? The most bullish influence this year has come from palm oil. In the world of vegetable oil, palm oil is the number one source and palm oil prices have been rising throughout most of 2016.

Back in early-February, DTN Senior Ag Meteorologist Bryce Anderson and I talked about a new one-year high in spot palm oil in DTN's daily closing market video and the bullish effect it was having on soybean oil. At the time, palm oil production in Malaysia and Indonesia was being hurt by El Nino-related drought. Supplies were expected to tighten at least until June when El Nino's impact was expected to weaken.

El Nino did come to an end in late-May and palm oil prices turned lower in June as many anticipated. What was not expected however, was a resurgence of demand for vegetable oil in 2016. In the closing market video of Aug. 15, Bryce and I found ourselves talking once again about rising palm oil and soybean oil prices.

Officially, USDA is expecting world vegetable oil production to increase 5.1% in 2016-17 to a record high 186.87 million metric tons.* In spite of the record production, world ending stocks of vegetable oil are slated for a modest decline to 18.39 mmt, the lowest in five years as USDA expects increases in both food use and industrial use.

The case for higher vegetable oil demand was also supported Monday by news that India was cutting its import tax on crude palm oil from 12.5% to 7.5% and on refined palm oil from 20% to 15% in an effort to boost domestic supplies.** India is also known for being the world's largest importer of soybean oil.

In addition to the bullish demand environment that soybean oil finds itself in, prices have also benefited from a recent normalization of bean oil's relationship to meal prices.

For several decades, soybean oil prices have accounted for 34% to 46% of the total crush value of soybeans while meal took up the larger share of the balance. Before this year, soybean oil had only represented less than 30% of the total crush value twice in the past 50 years, yet at the end of June, January soybean oil represented just 29.6% of the soybean crush total.

Another way of putting it is that soybean meal prices were bid so high earlier this summer that they represented over 70% of the soybean crush -- a height seldom achieved and difficult to sustain. At one point in June, December soybean meal prices were bid $30 above the March contract, which indicated unusually strong commercial demand for new-crop meal.

Since late-June however, the premium in December meal has steadily eroded as commercial needs normalized. Spot soybean meal prices have come down 27% while soybean oil prices have risen nearly 6%, bringing January soybean oil's share of the soybean crush back to a more normal 36.7%.

The fact that soybean oil could rise at all when traders are expecting 4.2 billion bushels of new soybeans this fall is a testament to the two-fold impact of increased world demand for vegetable oil and a normalization of soy product values. A weekly spot close in soybean oil above 35 cents a ton seems unlikely this fall, but if it happened, would be another bullish sign of world demand for vegetable oil and a contributing bullish factor for soybean prices.

* Found in Table 6 of USDA's Oilseeds: World Markets and Trade, Sep. 2016:

http://apps.fas.usda.gov/…

** "India's import tax cut to spur demand, support palm oil price" from Nikkei Asian Review, Sep. 26, 2016, at:

http://asia.nikkei.com/…

Todd Hultman can be reached at todd.hultman@dtn.com

Follow him on Twitter @ToddHultman1

(CZ/BAS)