The following is a quote from Oil World, a private oilseed forecaster: “Global soymeal exports are insufficient to meet demand because of port and transport disruptions in South America.”
This statement is describing the problem facing the old crop soy complex right now. As we get later into the summer, the problems will only get worse. It is a self-fulfilling problem that feeds on itself and can only be solved by greater supply. The dilemma lays out as follows:
- There is not enough soymeal in the United States to meet demand. To help meet demand, crushers were planning on turning beans into meal using cheaper South American imports, as there is a lot of product available and the crush margins would be well in the green to support their efforts. But, because of the Brazilian port situation, the beans are not coming as quickly as the crushers wanted. The cheap product they could turn into expensive meal is apparently not in the cards.
- Now soybean crushers are stuck. They cannot source US beans cheap enough to crush at positive margins, but don’t have enough meal to meet demand for the next few months. Negative margins mean that they will lose money by crushing beans (think of this as the equivalent of paying to go to work.) As for profit businesses, they will not crush at a loss, they would rather shut down.
- If processors do not crush beans, they will NOT be making more soymeal which pushes soymeal prices higher to curb demand.
- If soymeal goes higher then, the crush margins grow more positive, which encourages the further crushing of soybeans. That action should rally the price of beans, squeezing the margins once again…and rinse, repeat.
- I expect this to be the cycle until one of two things happens:
- When South American (SAM) beans hit US shores in mass, the bean prices will ease up here, which will then allow producers to continuously crush beans to help solve the tight meal problem. Although according to Oil World, this won’t happen.
- If SAM beans don’t arrive in masse, the market will push the price of soymeal so high that demand will break and the amount of beans necessary for crushing will fall. Basically, the margins go so negative, like they did with ethanol last summer, that plants shut down. The only way this can happen is if meal prices break demand, making prices so high that it is better for end-users to not use the meal now, and instead they’ll just kill whatever was meant to be fed, or feed something else (corn or wheat perhaps?).
At this point, I think we’re more likely to see #2 happen. Because of this I want to own August meal, as I believe it needs to price out current demand and should rally to where July is now (460) before it goes off the board.. There are a number of ways to play this:
- Bull call spread on soymeal options (least aggressive)
- Go long August Meal and Sell December Meal (more aggressive)
- Go long August or September Meal futures alone and hold on (most aggressive)
Crush Margins as of 9:50 am on June 18.
As you can see, August beans have room to rally. I have been watching this graph over the last month, and anytime July margins went negative, prices fell in soybeans as buying stopped. Meal will be leading any rallies. Expect it to wag the dog over the next 60 days.
Remember, this is a short term problem. New supplies of beans will be available in the next 120 days. But because the SAM product won’t get here, prices should remain high. You don’t want to be the last one holding the bag on this trade, but I feel price needs to take over to correct the supply situation.
For those who like to observe prices, watch how July beans and meal react AFTER first notice day. This could be a clue for what August (or even September) will do in the future. As always, call or email with questions.
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