Todd's Take

Don't tell soybean meal, but its price behavior has been rather odd lately. A little like Forrest Gump carrying Captain Dan unscathed through the jungles of Vietnam while all hell breaks loose around him, soybean meal shows little sign of realizing just how bearish the world has become for grain-related contracts in early 2019.

Just this past week, spot corn and July soybeans fell to new seven-month lows, and spot KC wheat slid to its lowest prices in over a year. What did soybean meal do? Prices jumped $5.60 on Thursday and were actually up $2.80 a short ton at Thursday's close for the week.

To understand how strange that is, here are some of the basics: As everyone should know by now, soybean supplies have been building rapidly in the U.S. the past year while China holds a 25% tariff. Maybe trade talks are close to the finish line as officials continue to suggest. But we've heard that kind of talk for several months, and so far, there is nothing to show for all the effort except piles of travel receipts and bills from translators.

In addition to China's demand-killing tariff on U.S. soybeans, China has also been fighting the spread of African swine fever this year, and if reports are accurate, the swine herd could be down 20% or 30% in 2019.

Obtaining reliable numbers out of China is a challenge, but I don't hear anyone saying the problem isn't real or significant. Again, it is difficult to estimate how much feed demand will be lost due to African swine fever, and some of the loss will be offset by higher demand for other protein sources like beef, poultry and seafood.

On the other side of the world, Argentina is currently harvesting a soybean crop USDA estimates at 55.0 million metric tons (2.02 billion bushels), up from 37.8 mmt a year ago. In other words, the weather has been good enough that the world's largest exporter of soybean meal will soon be back in the processing business, exporting 29.3 mmt of meal, if USDA's estimate for 2018-19 is close.

Given the above, any self-respecting analyst would expect meal prices to be trading near 11-year lows, similar to what we see in soybeans -- but that is not the case. July soybean meal is currently holding above three-year support at $304.00 and, as of this writing, shows no sign yet of breaking down.

Not only are meal prices not falling apart, Thursday's higher close has soybean meal close to turning the weekly stochastic higher -- a possible sign that downward momentum is fading.

I have mentioned before that some of the best market clues come from noticing "the dog that didn't bark," an old Sherlock Holmes reference that seems to apply to soybean meal in 2019.

If there is something bullish happening in soybean meal, what might it be? That is not easy to answer, but one suspicion is that the recent strength in soybean meal prices could be related to Argentina's financial problems.

According to Kenneth Rapoza at Forbes.com (https://www.forbes.com/…), investor concerns are increasing that Argentina will default on $56 billion of debt held by the International Monetary Fund. With inflation running at 51% over the past year, President Mauricio Macri is not doing well in the polls ahead of this year's October election.

Argentina's peso is losing confidence, having lost over half its value the past 12 months. Normally, a lower currency would help stimulate exports like soybean meal, but when people lose faith in a currency, commerce becomes difficult. People then try to hold on to tangible assets in an effort to preserve buying power.

I can't guarantee Argentina's situation is the next bullish trigger for soybean meal prices, but at the moment, it seems the best explanation for meal's unusual resilience. You never know where the next surprise in grain markets is going to come from, but right now, soybean meal is as good a candidate as any.

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

Follow him on Twitter @ToddHultman

(BE/AG)

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