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.