Market Matters Blog

Recent strength in global vegetable oil markets should be enough to pique our interest and inspire a deeper look. As expected, intriguing clues are not hard to find and spoiler alert -- they don't point to merely short-covering.

There isn't time to dive deeply into too many fundamental factors but given how important the latest World Agricultural Supply and Demand Estimates (WASDE) report was, we'll focus our attention there. Carry-in stocks were cut from the previous month's estimate due to increased domestic use in 2023-24. 2024-25 production was reduced because of lower soybean crush with adequate soybean meal supplies being the reasoning. Imports increased slightly, leaving a net reduction in ending stocks of 251 million pounds (mlb) and carry-out near pipeline levels at 1.536 billion pounds.

Where it really gets interesting is exports being left unchanged at 600 mlb. With weekly sales totals reaching multi-year highs recently, 512 mlb has been committed in just the first month of the marketing year or a whopping 86%. India has been the top buyer, expected to be a result of its decision to increase biofuel blending requirements. It's quite likely that recent sales were too fresh for the USDA to incorporate into this report. Going forward, it will be hard for USDA not to increase exports -- with little room on the balance sheet to do so.

For anyone questioning the export potential, the 25-year high mark was 3.359 billion pounds in 2009-10 followed closely behind by 2010-11 at 3.233 billion pounds. Clearly there is no room to return to anything even close to that, but it does highlight the implications export potential could have.

Domestic use is far less certain, given the political developments unfolding. On the negative side and providing recent price pressure is the new administration's top pick to head the Environmental Protection Agency. Lee Zeldin, a former congressman from New York, is on the record opposing the Renewable Fuel Standard. His track record of questioning the validity of blending requirements could be an issue going forward. Offsetting that should be breaking news that the new Senate majority leader will be John Thune, a strong supporter of biofuels. Not to mention the likelihood that used cooking oil from China should be a prime target for substantial tariffs under the new administration. The latter is not an insignificant point considering imports in the first half of 2024 totaled over 1.3 billion pounds -- destined for use by renewable diesel plants and generally displacing soybean or canola oil.

Crude oil could yet be a headwind or a tailwind as discussed in the Oct.30 blog (https://www.dtnpf.com/…). So far, the market has focused on President-elect Donald Trump's promise to do everything possible to increase supply and bring prices down. It is far from being clear whether that was just campaign rhetoric or based in fact. A reduced demand forecast from OPEC+ and a strong US dollar have not helped with crude currently trading under the $70 per barrel level. Should Middle East tensions escalate under the new administration, prices could quickly return to recent highs.

Looking at the technicals, monthly and weekly continuation charts contain similar clues: A bounce from long-term support at 38 cents per pound (previous resistance). A clear break of the downtrend in place since the 2022 market top (with a retest currently taking place). A divergence bottom suggesting greater internal strength than what price action indicated during the break. And finally, a recent test of resistance just under 50 cents.

The daily chart has been trending higher since mid-August with resistance at 45 cents clearly taken out at the start of November. A lack of buying, when the July high (of 48.89 cents) was surpassed, triggered profit-taking with the pullback accelerating on the news of the new EPA pick and related risk. Various indicators suggest the daily chart has turned bullish, with support near 45 cents likely to hold as buyers take advantage of the break.

Analysis of market participants themselves shows money managed funds going from a record net short position in June to 63,706 contracts net long by Nov. 5. Given their record net long was 126,543, plenty of buying support could be seen yet. That large of a change in such a short period of time is a bit concerning as a profit taking event could occur at any time -- like the one just experienced, for example.

Bringing it all together, an exceptional export pace along with strong domestic use should tighten the soybean oil balance sheet further with increased crush likely necessary. Additional price strength following the nearly two-year slide would be reasonable to expect, providing spillover support for canola. Being patient and making incremental sales that reward rallies appears to be an appropriate marketing strategy at this point.

Mitch Miller can be reached at mitchmiller.dtn@gmail.com

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