According to the U.S. Labor Department, U.S. consumer prices were up 5.4% in September from a year ago and energy prices were up 24.8% from a year ago. All around us, we are hearing about a threat of rising prices and difficulties obtaining supplies, from fertilizer to used cars, to semiconductor chips to you name it. Even purchases of toilet paper are being limited again.
There is one commodity in the grain sector, however, that seems to be readily available and is bucking the trend of rising prices. Soybean meal, the widely popular feed ingredient that has experienced strong demand for over 30 years, became the first unlikely bear in a bull market in June of this year, and has proceeded to fall to its lowest prices in over a year, settling at $314.10 per short ton on Thursday, Oct. 14.
You may recall I wrote about meal one month ago, making a case for why it should have had support near $340 per short ton. Not only has it gotten cheaper since then, meal has also become cheap in comparison to that other popular feed ingredient, corn. The two are not the same and corn is priced in dollars per bushel, while meal is priced in dollars per short ton. When we compare the two, we see a consistent relationship over the years. Currently, meal prices are at their lowest level compared to corn since 2013 -- another sign of attractive value.
Fundamentally, the deep dive in meal prices is difficult to explain as spot meal's low during the depths of the initial pandemic was $280 in June, not much lower than now, at a time when the outlook for demand looked extremely bleak -- no one knew how long it would be before people would go out and interact again.
Today, just over a year later, COVID-19 is still a concern and restaurants are struggling, but overall, the economy is much more vibrant than it was. Demand has rebounded so rapidly that production has not been able to keep up, and the result has been rising prices and shortages of all kinds of goods.
One of the unlikely bullish winners of 2020 and 2021 was the vegetable oil sector. To protect itself from COVID-19, Malaysia blocked immigrants from entering the country, but that also made it difficult to produce palm oil without a labor force. Demand for palm oil, however, quickly rebounded and sparked a rally in the vegetable oil sector, including soybean oil.
Drought hurt U.S. soybean production in the northwestern Midwest and damaged canola crops in Canada. China added more fuel to soybean oil's bullish fire, buying 1.31 billion bushels of soybeans from the U.S. in 2020-21 and leaving U.S. domestic supplies in a tight predicament.
If all the above wasn't enough, demand for soybean oil ratcheted even higher in 2021 on prospects that biodiesel would find favor with a new administration seeking to bolster investment in clean energy. The jury is still out on that one, but bean oil has found support from rising crude oil prices as the world economy continues to show improvement.
Traditionally, soybean meal has been the driver of the decision to crush soybeans and, for many years, the result was large inventories of unused soybean oil that would be sold off at cheap prices. Since the pandemic, the tables have turned and it has been bean oil driving the crush decisions.
The strange thing is actual demand prospects for meal also remain strong. USDA estimates world demand for meal will be up 3.2% in 2021-21. Demand in China, the world's largest consumer of meal, is expected to be up 4.3%. Meal may not be driving the crush decisions these days, but it won't be piling up unused in some corner either. Meal is a fantastic feed ingredient that benefits from rising world incomes, especially China's rising income.
So why are meal prices being treated like a modern leper?
As is often the case when market prices get distorted, I suspect the sudden popularity of bean oil over meal has caused spread traders to take on too much of a good thing and has driven meal prices lower than they deserve.
In the real world, U.S. ending soybean supplies are estimated at 320 million bushels for 2021-22, a comfortable but not excessive amount. There is plenty of uncertainty in the season ahead and we have not yet seen China's demand, but early indications look promising.
As usual, I can't guarantee soybean meal prices will go up from here, but for a wide variety of producers who need to buy meal for their feed mix, I have to point out that you are currently being offered the cheapest prices in over a year. Given the current fundamentals, the only thing more bullish at this point would be to see commercial positions turn net long.
Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.
Todd Hultman can be reached at Todd.Hultman@dtn.com
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