Todd's Take

At the end of November 2018, I laid out what I thought looked like bullish arguments for soybean oil prices. Read "Soybean Oil, Ripe for Bullish Change" here: https://www.dtnpf.com/….

Fundamentally speaking, the article cited recent changes for soybean oil, such as a new mandate in Brazil, which starts in March 2018 and requires an 11% blend of biodiesel. New tariffs in the U.S. are offering competitive protection from Argentina and Indonesia. U.S. export commitments of soybean oil were up 54% at the time of the November article and were still up 43% in mid-December as of USDA's most recent export sales data available.

More recently, Dow Jones reported that the Jan. 15 crush report from the National Oilseeds Processors Association showed 1.50 billion pounds of soybean oil stocks on hand in the U.S. as of the end of December. That was down 3% from a year ago and a clue that demand seems to be picking up.

As helpful as those fundamental changes should be to soybean oil prices, they don't necessarily point to significantly higher prices. Technically, however, some major changes in trend are being hinted at.

As pointed out in November, market sentiment in soybean oil had become especially bearish after two years of steadily falling prices. The combination of speculators and futures funds becoming net short at a time when spot soybean oil prices were near their lowest level in 12 years was too bullish to ignore from a contrarian perspective. Couple that with commercial willingness to go net long when spot prices were below 29 cents a pound and the bullish case for soybean oil was easy to make.

Since the November article, spot prices have started to turn higher and are now presenting us with a monthly chart that appears to be emerging from a long-term low. Looking from a longer-term perspective, we see soybean oil prices haven't just been sliding lower the past two years -- this bear market actually started back in March 2008 at a peak of over 71 cents.

A series of lower lows and lower highs since then saw prices tumble 64% to 25.38 cents by August 2015. After August, spot soybean oil prices traded higher for a year and a half, and then lower for two years, but have not been back to the 25.38-cent low.

Spot soybean oil finished 2018 at 27.55 cents a pound, which was not only close to the low end of its five-year range, but also near its lowest prices in 12 years. Thursday's close of 29.56 cents was a new three-month high and is threatening to turn the monthly stochastic higher -- a distinct change in soybean oil's bearish momentum, which should attract bullish attention from noncommercials.

The challenging part of believing in higher soybean oil prices beyond the lack of a strong fundamental reasoning is the bearish risk posed by the possibility of a billion bushels of ending soybean stocks in the U.S. for 2018-19 and possibly longer.

Lack of fundamental explanations are common near long-term lows, but it sure would help to have a reason to believe soybean stocks won't be so burdensome. As usual, I can't guarantee how this one will turn out, but from a technical perspective, higher soybean oil prices look promising in 2019.

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

Follow him on Twitter @ToddHultman

(BE/AG)

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