Despite the severe drought in the Northern Hemisphere this past summer, the global supply of vegetable oils is actually expected to grow in the 2012-13 marketing year. However, the recent unusual activity in the U.S. export market underscores the fact that the market for the various major oil types does not necessarily overlap. U.S. export volumes of soybean oil have been explosive. A comment in a recent report by the German oilseeds analyst Oil World summarized the situation well: “This illustrates that the substitutability of the individual oils is having its limits.”
Consider these statistics. Since the beginning of the marketing year, which began on Oct. 1, U.S. exporters have sold 590,000 tonnes of soybean oil, compared with only 140,000 tonnes at this time last year. In historical terms, these sales levels are not without precedent. In 2009, commitments at this point of the season were 716,000 tonnes, and in 2010 they were even higher, at 796,000 tonnes. This year’s sales are still worthy of attention, though. At this time of year in the previous 10 years – including the extraordinary sales seen in 2009 and 2010 – commitments averaged only 312,000 tonnes by the beginning of December.
The USDA had been forecasting surprisingly low U.S. final sales for 2012-13. Until now, the estimate for the whole season was below year-to-date commitments. In the December crop report, the estimate finally caught up to reality, to some degree. The estimate was revised up by more than 50%, to 820,000 tonnes. That compares with final sales of 660,000 tonnes for 2011-12, but is considerably below 2010-11 sales of 1.47 million tonnes. Average final sales for the previous 10 years were 932,000 tonnes. We believe it is unlikely that sales will not exceed the 10-year average, given that sales to date are already double the 10-year average.
After suffering through a scorching drought this past summer, the 2012-13 U.S. soybean crop harvested in the fall turned out much better than anybody believed it could. The November USDA crop report raised its estimate for the crop to 80.86 million tonnes, which is 10% above the lowest estimate of the season.
Soybean output from both Brazil and Argentina output is expected to stage a dramatic recovery from last year’s severely weather-compromised crops – up 35% for Argentina and 22% for Brazil.
The issue is that soybean oil supplies have been run down. Even with the better-than-anticipated crop in the U.S. and the record crops coming out of South America, the market for oil is tight. The USDA estimate for 2012-13 global ending stocks – even after including the large bean crop harvested and to be harvested in the spring – is 3 million tonnes, or 6.9% of consumption, a record low. That is down from 9.1% in 2011-12 and an average of 9% of usage in the 10 previous marketing years.
Chart 2 shows the soybean/soybean oil price ratio. It illustrates quite clearly what’s been happening. Up until this past summer, oil supplies were plentiful, so prices were depressed vis-à-vis bean prices. Now that demand seems to have been revitalized, prices have begun to strengthen.
We’ve definitely become bullish on this market. What makes this a particularly attractive long is that it is hardly a crowded trade. Open interest is at the lower end of the range of the past two years (Chart 3). Even more appealing is that the funds are short (Chart 4). If we’re right about our read of the fundamentals, the ensuing short-covering rally alone makes for an interesting trade.
Buy March soybean oil. Place initial stops at 49.5¢ per pound, close only.