Todd's Take

As retailers have long known, there's nothing like a good sale to bring buyers to the door. Menards built a business on sacks that promise 11% off, but if you want a really good crowd, advertise 50% off and we'll be standing outside your door before opening time. In the futures market, we just saw two successful 50% off sales earlier this summer in soybean oil and ultra-low sulfur diesel.

In the case of soybean oil, the most active futures price hit a new all-time high of 87.65 cents in April 2022. Drought in Brazil led to a smaller-than-expected harvest in early 2022 and boosted soybean prices at a time when the market was starting to see signs of increased soybean oil use for making renewable diesel. For the first time in soybean history, crushers were seeing strong demand for both soy products and the value of crushed soybeans was exceeding the cost of uncrushed soybeans by $3.00 a bushel and more. For soybean processors, the new demand was manna from heaven.

Less than two months after that frothy peak, the tables turned on soybean oil as traders became worried about the Federal Reserve's campaign to fight inflation with higher interest rates. Specs that were net long nearly 107,000 contracts at the April peak sold positions in two liquidating moves. In June, Federal Reserve Chairman Powell warned of a possible recession and traders bailed out of the long side of commodity holdings.

The second wave of liquidation picked up steam in December after the Environmental Protection Agency (EPA) released proposed biomass-based diesel mandates, totaling 2.89 billion gallons for 2024 and 2.95 billion gallons for 2025 -- amounts that renewable diesel industry reps pointed out were woefully short of current expansion plans. Coupled with early expectations for a record soybean crop in early 2023, spot soybean oil prices fell to a low of 44.53 cents on the last day of May 2023, down 49.2% from the May peak of 2022 and close enough to qualify as a half-off sale.

In this particular case, the half-price bargain worked. On June 1, soybean and soybean oil prices closed higher after the U.S. Drought Monitor showed widespread expansion of abnormally dry conditions across the Midwest. A combination of Drought Monitor data and USDA data showed the percentage of soybean crops experiencing D2 conditions or worse went from 10% before May 30 to 32% by June 27. During the same time, on June 21, EPA issued final biomass-based diesel mandates that were a little higher than proposed, 3.04 billion gallons for 2024 and 3.35 billion gallons for 2025. EPA also explained that more help for renewable diesel producers was available in the advanced biofuel category.

Not only did soybean oil prices climb higher in June, they were the leading percentage gainer among grain-related contracts in June and are running a close second place in July, just behind soybean meal. After a 26-cent gain in less than two months, August soybean oil prices have signaled strong crush demand ahead, at a time when the soybean crop is being threatened by the possibility of difficult August crop conditions.

The one possibility that could carry demand for soybean oil even higher in 2023 is if diesel prices became more expensive and that started happening recently. On a DTN closing market video on June 2, 2023, I mentioned that both, spot soybean oil and ultra-low sulfur diesel prices were offering half-off sales from the 2022 peaks. While soybean oil started trading higher on June 1, spot diesel futures chopped sideways to a little higher in June as traders remained concerned world demand would be slower in 2023 and would hold fuel prices down.

Technically, the lackluster trading in diesel changed on July 7 when September diesel futures jumped to a new two-month high of $2.542 a gallon, closing back above its 100-day average for the first time since January. Less than three weeks later, September diesel closed at a new six-month high of $2.9088 a gallon on July 27, the result of improving economic demand at a time when the U.S. Energy Department describes world oil supplies as being tightly balanced. This month's run-up in fuel prices was also likely enhanced by Russia's increased attacks on Ukrainian ports and the uncertainty of a war that is getting more active this summer.

The market is full of surprises and there will be more ahead. Even if soybean oil doesn't go any higher from here, the bullish influence of crush incentives on soybean demand is apt to continue, at least until more is known about the fall harvest. Here, near the end of July, a strong rally in September diesel futures is suggesting previous economic worries were overblown and demand in 2023 may turn out stronger than earlier expected.

What seems apparent is the market is experiencing impressively strong demand for diesel fuel, soybean oil and, therefore, U.S. soybeans. With 20% of the soybean crop currently experiencing D2 drought conditions or worse, there seems to be a lot of bullish potential for U.S. soybean prices in 2023-24.

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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 Todd Hultman on Twitter @ToddHultman1

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