Todd's Take

Soybean Oil, Ripe For Bullish Change

January soybean oil peaked near 38 cents a pound in December 2016 and has been falling since, pressured by an active pace of soybean crush. Now priced just below 28 cents, some bullish changes are starting to take place (DTN ProphetX chart).

For most of 2018, soybean oil has not exactly been a hot topic. Caught on the wrong end of this year's increased soybean crush, spot soybean oil prices are down 16% since the end of 2017, pressured by lower world vegetable prices in general, and the greater popularity of soybean meal after Argentina's soybean harvest fell short due to drought earlier in 2018.

Soybean oil's latest downtrend actually began nearly two years ago after prices peaked near 38 cents a pound. U.S. soybean oil stocks had dropped to 1.42 billion pounds in September 2016 and noncommercial speculators, including managed futures funds, turned excessively bullish, amassing their largest holdings of soybean oil net-longs on record.

Soybean oil stocks replenished after that lull in late 2016 and now, almost two years later, the most recent inventory of U.S. soybean oil stocks from NASS stands at 1.64 billion pounds, 13% higher than what we saw two years ago. Those record noncommercial net-long positions disappeared a long time ago. The most recent Commitment of Traders report shows noncommercials net-short 31,909 contracts and managed futures funds net-short 79,247 contracts as of Nov. 20, 2018.

Fundamentally, there was interesting news this week, which should be helpful to future soybean oil prices. On Tuesday, DTN China Correspondent Lin Tan blogged about a new mandate in Brazil, which requires diesel fuel to include an 11% blend of biodiesel, starting March 2019. Each year, 1 percentage point is added to the mandate until 15% biodiesel is achieved in 2023

Here is the link to read the blog: https://www.dtnpf.com/…

Also on Tuesday, DTN Political Correspondent Jerry Hagstrom blogged on a return of the $1 per gallon biodiesel tax credit, which is included in a proposed tax package that would go from 2018 to 2021, and then be gradually phased out at the end of 2024.

Here is the link to read the blog:

https://www.dtnpf.com/…

On Wednesday, DTN Staff Reporter Todd Neeley noted in a blog that Argentina's government was granted a request for a review of the Commerce Department's earlier decision to impose stiff countervailing and anti-dumping duties on biodiesel imports from Argentina and Indonesia. U.S. biodiesel trade groups are asking President Donald Trump to intervene on their behalf. An immediate response is not expected and a review could take until August.

Here is the link to the blog:

https://www.dtnpf.com/…

Even so, the duties remain in effect. While soybean oil prices have not yet shown positive impact from the protective duties, they certainly offer important competitive protection.

The final fundamental point in soybean oil's favor is the current popularity of U.S. exports. As of Nov. 22, USDA shows total export commitments for soybean oil up 54% from a year ago -- not a bad early start for 2018-19. The top export destinations so far have been South Korea, Colombia, Dominican Republic and Mexico.

From a longer-term perspective, spot soybean oil prices are near their lowest levels in 11 years, but so far, are holding above the 2015 low of 25.38 cents. Of course, I can't guarantee soybean oil prices will be up in 2019, and it does look like the U.S. is going to have plenty of soybeans on hand. But to see futures funds so bearish at levels this cheap when some positive changes are starting to happen for soybean oil, it's difficult for this contrarian to not be bullish.

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

Follow him on Twitter @ToddHultman

(BAS/SK)