Todd's Take

Crush one 60-pound bushel of soybeans and you're apt to get 46.5 pounds of meal and 11.88 pounds of bean oil. Traditionally, it's been meal that the market has been most interested in, the main reason soybean demand has more than tripled the past 30 years.

Soybean oil was often seen as the weak sister of the soybean complex, the byproduct that helped supplement soybean's value, but didn't really drive soybean prices.

That changed in the past year.

One year ago, soybean oil was quietly trading under 30 cents a pound, near its lowest prices in 13 years and accounted for roughly one-third of soybean's crush value. Earlier this month, July soybean oil briefly traded at a new all-time high and accounted for over half of the value of the soybean crush.

The dramatic and unexpected rise of soybean oil prices the past year happened as demand for the vegetable oil sector ramped up quickly. Production of palm oil, the world's leading source of vegetable oil, was restrained by measures designed to protect Malaysia from the spread of coronavirus. In 2021-22, USDA is estimating ending palm oil stocks at a five-year low of 11.13 million metric tons (mmt), while palm oil production is expected to increase by over 4%.

In the U.S., most soybean oil has edible or industrial uses. USDA estimates 12 billion pounds of bean oil or 47% of domestic use is for the production of biofuel. When President Joe Biden took office with the high priority of promoting clean energy sources, soybean oil prices rose dramatically, as many expected biodiesel to earn political favor.

July soybean oil was trading at 41.27 cents on Jan. 20 when the President took office, and on June 7, briefly hit a new all-time high of 73.74 cents a pound, a 79% increase in less than five months. The rally was a major source of support for soybean prices in early 2021 and happened at a time when meal prices were chopping sideways to lower.

The 32-cent rally was impressive, but there was always a flaw in the math. It was going to be very difficult to promote increased biodiesel use when soybean oil supplies were so tight. The U.S. simply doesn't have a lot of surplus soybeans or soybean oil available. As soybean oil became more difficult to secure, the price of biomass diesel D4 RIN prices climbed above $2.00 in early June and the oil refiners' lobby got on the phone.

On Friday, June 11, bean oil's bullish optimism started to unravel when the July contract closed down 3.48 cents, almost a limit-down move. Palm oil was an early bearish influence that day, hitting a new one-month low with expectations for increased Malaysian production later in 2021.

The larger bearish hit, however, came from a Reuters article that claimed U.S. Senators were asking President Biden to ease the biofuels blending mandates on behalf of oil refiners. Bloomberg followed with a similar report Wednesday and on Thursday, bean oil fell by its 5.50-cent daily limit, a 20% decline in five quick trading sessions. D4 RINs that were above $2.00 on June 10 closed at $1.38 on Thursday, June 17.

Late Wednesday, DTN's Todd Neeley reported that Democratic lawmakers sent a letter to the Environmental Protection Agency (EPA), urging the agency to stick to the President's low-carbon goals and issue 2021 and 2022 renewable volume obligations with strong blending targets (see https://www.dtnpf.com/…).

So far, there has been no official word from the White House and the market has used its bearish imagination to pressure bean oil prices lower. In a sea of fundamental confusion, we note that July soybean oil still holds a 2.23-cent premium over the August contract, a bullish sign of demand in spite of the political concerns and rapid noncommercial liquidation.

The short-term trend, defined by the 20-day average, was broken on Friday, June 11, and July soybean oil prices fell below the 50-day average on Wednesday's limit-down close (June 16), the first such violation since October. After Thursday's close, July soybean oil at 56.57 cents is holding a slim margin above its 100-day average at 55.68 cents, a line of support that has not been violated since June 2020.

One other strange aspect to this story comes from Reuters and Nasdaq.com, reporting Wednesday China's Premier Li Keqiang made a public statement on a farm in northeastern China, saying China should keep grain prices at "reasonable levels." (See https://www.nasdaq.com/….)

The Premier did not specify how the country should do this but clearly sent a message that he does not want nationals bidding prices higher -- a not-so-subtle use of the Chinese government's bully pulpit.

Where does this leave soybean prices? Noting, as usual, that I do not have a crystal ball, November soybeans at Thursday's close of $12.52 3/4 look undervalued in terms of today's tight supply estimates. China's words can have dramatic short-term effects on the market and are good at scaring speculators, but China can't make soybeans magically appear if planted acres are low or drought levels turn out to be high. There is still a lot of uncertainty in the season ahead and the bottom line is that China cannot produce the soybeans is needs. China will continue to be the world's largest buyer.

Technically, the strong upward momentum of both soybean oil and soybean prices have taken bearish hits, but with U.S. soybean supplies so tight, it is difficult to describe either as bearish markets.

Meanwhile, many of us are waiting for June 30, when USDA will estimate how many soybean acres were planted in 2021. Between plantings and weather, there is a decent chance the U.S. will not be able to produce enough soybeans to meet demand needs in 2021-22 -- a potentially bullish predicament for soybean prices that is still on the table.

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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

Follow him on Twitter @ToddHultman1

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