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(September 30, 1997) SOYBEANS: SOYBEAN OIL–The soybean oil market has remained under pressure for some time. From March through June alone, bean oil prices declined 5 dollars or roughly 10 percent in value.
To understand the decline, I believe, a discussion of the soybean crushing process is necessary. In summary, when soybeans are harvested, they must be crushed for either their oil or meal content. Soybean oil is used in a multitude of food items. Bean meal, on the other hand, is often used in feeding livestock.
Currently, and for the past twelve months, global meal demand has outpaced oil demand significantly. Therefore, bean crushers have crushed soybeans to meet their expected meal demand. The result has been increasing supplies of soybean oil with prices near their lowest level in five years.
When bean oil prices decline near 22 to 23 dollars, as they have within the last two to three months, I believe end-users of the product have increasingly positioned long. In my opinion, they recognize that bean oil prices are at fairly inexpensive levels. Additionally, I feel they are fearful of an upcoming weather event known as “El Nino” and its potential impact on price.
The El Nino event begins with warming in the Pacific Ocean and can significantly disrupt global weather patterns. The result can be drought or flooding.
Most meteorologists agree that this years El Nino is the strongest since 1982/83 and could impact agricultural regions in the Far East and Southern Hemisphere. If this were to happen, Indonesian palm oil crops and Brazilian soybean crops could be damaged and the world vegetable oil supply diminished. If this occurs and oil supplies tighten, United States bean oil prices may increase as they become more competitive on the world market.
Roughly two years ago, bean oil prices reached 35 dollars as China aggressively purchased U.S. soybean oil. If they were to return to the U.S. market in the following months due to more competitive prices, a sharp rally might ensue.
When analyzing the charts, I believe the end-user support is evident as bean oil begins to build a base near five year lows at roughly 22 to 23 dollars.
In my opinion, a common inverted head and shoulders bottom formation is in the final stages of development. I believe the right shoulder will continue to form as the U.S. harvest nears completion.
Therefore, traders may wish to initiate longer-term option strategies hoping to take advantage of the upcoming El Nino and protect against the near-term price volatility and/or declines due to harvest.
Mike Peifer
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