A change in direction for soybean oil?

The future cost of carry for soybean oil is stimulating demand while US soybean processing is at its second highest level ever. It is worth noting that this may still not be enough to meet the demand from the food and renewable biomass industry.

The soybean oil futures market, which is often used to hedge various global vegetable oil risks, including other non-soybean oils, has sent an early “I’ve hit bottom” signal and “I can start trending higher” signal as well.

Let’s first take a look at the Chicago Mercantile Exchange’s complete futures curve, always the first place most fundamentalist, discretionary traders go to get an understanding of the market’s structure that should reflect supply and demand.

At Monday’s market close, the structure of soybean oil futures contracts shows a carry cost on the very front end of the curve (May soybean oil at $0.5457 and July soybean at $0.5470 per pound) that provides some incentive, not much, but some, to buy oil today $0.0013 cheaper than in the future, that is, $0.5470 – $0.5457 = $0.0013. This cost of carry stimulates purchases for today’s demand as well as tomorrow’s, i.e. buy it today and carry it because it is cheaper today than tomorrow, i.e. a “carry” market.

And “carry” makes sense because physical traders have found it more advantageous to sell soybean oil through the futures market instead of directly to consumers in the physical market, never a good sign of demand and almost always a sign that physical supply exceeds demand.

Soybean oil receipts in the CME’s “deliverable goods under registration” show 613 sitting in the delivery window waiting for a buyer, often referred to as a “sponsor” in trader language. The buyer or sponsor will not purchase these soybean receipt oils until the price of physical soybean oil exceeds the futures prices by a certain value (this starts to include some shipping and execution calculations that are not necessary for illustrative purposes today). 613 receipts, each representing a 60,000-pound tanker truck filled with soybean oil sit in the “delivery window” with the majority at a Cargill Inc. facility in Creve Coeur, IL (highlighted in yellow).

That the market remains in one transportation makes sense given that these receipts sit in the delivery window as the holder of these receipts incurs storage costs and must be paid to carry the soybean oil (in this case a fraction of the total costs given the limited transportation but at least there is some contribution to offset the storage costs).

Still with me?

Now comes the point

For the holders of these soybean oil receipts to hold on, they must have an economic reason, mainly that the price of soybean oil will be higher in the future and therefore it makes sense to hold on to the receipts today as the holder owns the cheapest soybean oil available.

And this is the question.

The price of soybean oil is cheaper in the future not more expensive.

The full forward curve above describes prices and the chart below helps to illustrate the concept. The chart shows the spread relationship between the July soybean oil futures contract and the December futures contract and the chart shows that the July price is 0.0153 cents per pound higher than the December price. July soybean oil futures priced at USD 0.5470 – December at USD 0.5317 per pound. The market is inverted (in backwardation for renewable diesel traders) with nearby prices higher than deferred prices.

What is the message of the inverse, not this one, but any market that has an inverse for the consumer: postpone consumption until later because the price is cheaper in the future and the supply in the short term is tight so prices must necessarily reflect the density of higher prices in the short term.

The reverse sends a signal to the soybean processing producer as well: don’t store a single pound of soybean oil; sell each pound produced against the higher price in July instead of the lower price in December.

As the chart above shows, that inverse has weakened dramatically in recent months from a near $0.03 inverse to its current $0.0153 per pound, but the price curve is still inverted. Nearby physical supplies and receipts sitting in the delivery window have not been able to break the inverted curve into a carrier structure.

In summary, the market imperative is as follows:

Consumer: delay consumption until later, supplies are scarce

Producer: sell everything today or face financial penalties (lower prices) in the future.

Still with me?

Yesterday, the report from the National Oilseeds Processing Association (NOPA) was released. This is NOPA’s (mainly the US soybean processing industry’s business association) report that describes the operating costs of its members.

Yesterday’s release pushed an extremely high run rate for the month of March 2023.

The second highest crush rate ever means the U.S. soybean industry is pushing at its highest level of production capacity including newly built capacity. If there is not enough crushing capacity to produce enough soybean oil to meet the demands of the domestic food and renewable biomass industry, the market has a supply problem and the market has this function: to limit demand. And contraction occurs with higher inverses and higher prices.

The market’s “supply is tight” response to the NOPA report yesterday, higher soybean oil prices and stronger inverses, signaled a potential bottom for prices.

Let’s see what happens next. Confirmation that the market is entering a new demand phase that exceeds the supply phase (due to expansion of renewable diesel capacity and an increase in refinery capacity utilization that has so far not met market expectations) would include the following:

– Strengthening physical soybean oil

– Reinforcement of soybean oil futures contracts

– Consumers start buying soybean oil via CME delivery mechanism due to tight physical supplies

– The whole price structure for all vegetable oils is getting higher (see palm oil prices getting higher highlighted in yellow below).

Here’s how the USDA took a snapshot of global values a week ago.

Finally, take a look at the CME palm oil curve with the full futures curve for soybean oil. Tip: the carryn is gone.

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