Todd's Take

Palm oil is not one of the usual topics I cover when talking about grains, but a week ago Tuesday was one of those days when it could not be ignored. The January contract of Malaysian palm oil futures had jumped up 2% overnight to a new contract high, and the soy complex took note. December soybean oil finished the day up just over a half-cent a pound. January soybeans closed up 12 3/4 cents, back near a three-month high that was reached just two weeks earlier.

Both palm oil and soybean oil had been trading higher since July, helped by active international demand for vegetable oil and by palm oil's sluggish rebound in production after dry, El Nino-related conditions made their impact early in 2016. The rallies were impressive and helped to keep soybean prices sideways while the U.S. was anticipating a record soybean harvest. But on Nov. 4, the inability of December soybean oil to trade above its two-year high at 35.81 looked like a bearish change, which I explained in DTN's Closing Market Video with DTN Senior Ag Meteorologist Bryce Anderson.

Last Tuesday's new high in palm oil made me wonder if soybean oil would keep trading higher anyway, and it didn't help when palm oil jumped to another new high Thursday. News on palm oil futures isn't easy to come by, but I did see on Agrimoney.com that Malaysia's palm oil production was less than expected in October and down 18% from a year ago.* The site also mentioned production was being hurt by government efforts to reduce foreign workers.

This is where it gets tricky because although the article seemed credible, how are we to know if those production figures are legitimate? Trusting fundamental data is always a challenge and even more so when it comes from halfway around the world.

In this situation, palm oil's futures spreads offered valuable insight. On Nov. 8, when palm oil jumped to a new high, the December palm oil contract ended the day 15 Malaysian ringgits higher than the March contract -- a bullish inverse.

People in general and especially commercial interests don't just willingly pay more for nearby contracts unless they urgently need the palm oil and supplies are not easy to come by. For that reason, the bullish situation in palm oil looked legitimate, but we can't say the same for soybean oil.

In soybean oil on Nov. 8, the December contract was priced 0.47 cent below the March contract, which suggests a neutral-to-bearish commercial outlook that still holds true. As impressive as the higher close Nov. 8 was for soybean oil, it didn't have the same bullish market support that palm oil did. The difference became more apparent by the end of last week.

January palm oil jumped to a new contract high Nov. 10 and again on Nov. 11 when spot prices reached their highest close in four years. It was an impressive bullish performance, but this time, it did not translate to higher soybean prices.

By now you may have heard that USDA increased its estimate of U.S. soybean production to a record-high 4.36 billion bushels on Nov. 9. And you might have heard about a little election we had last week here in the U.S.

With 47% of this fall's soybean harvest slated for export and 76% of U.S. exports headed to China so far in 2016-17, it is easy to understand the bearish concerns of traders presuming President-elect Donald Trump is about to start a trade war with China. On the other hand, soybean purchases may get a short-term boost before Trump takes the oath of office.

So far, January soybeans are maintaining a mostly sideways trend, but last week's break with palm oil's bullish influence and a new four-month low in Brazil's real present new bearish challenges. With serious trade concerns on the table, a close below the September low of $9.40 1/4, if it happened, would flag a bearish change for soybean prices.

* "Palm oil prices hit fresh, two-year top, as Malaysia data spurs labour fears," by Mike Verdin of Agrimoney.com, Nov. 10, 2016, at:
http://bit.ly/…

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

Follow Todd Hultman on Twitter @ToddHultman1

(AG/ES)

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