The Soybean Roller Coaster Ride Isn't Over Yet

Soybeans have been crazy lately. In figuring out why, sometimes a picture is worth a thousand words.

chart from CBOT fundamental reports

Can you guess which year represents a crazy spike in soybean prices? If you said anything but 2007, get your eyes checked. Any white space between the CBOT's lovely industrial yellow supply line and the blue consumption line means shortages. The worldwide demand for soybeans is insatiable, and continues to climb, and 2007 represented the first real shortfall since 1995 and 1983. But in both of those years, soybean consumption at least waned. In 2007, demand continued to grow, and soybean stockpiles made up the difference. Worldwide consumers, it seems, were determined to have their soy latte, no matter what the price.

It makes you wonder what 2008's entry is going to look like, doesn't it? The market is tight, as evidenced by the fact that soybean prices surged to a new all-time high on March 3. Of course, the stomach-turning drops since then may be evidence to the contrary. The basic story remains the same though:

Farmers planted fewer beans in 2007 (squeezing supply) and global demand continued to grow. A quick glance at the chart below shows soybean prices more than doubling since the fall of 2007. Can it possibly keep going?

Soybean (S,CBOT) Monthly Chart

Soybeans on CBOT hit an all-time high of $15.8625 on Monday. Some analysts are claiming strong global demand and rallies of both soy and other vegetable oils on overseas markets are responsible for the rise. In fact, determining which came first - a rally in soybeans or a rally in other vegetable oils - is a chicken-and-egg question. They are all intrinsically linked both in supply and demand.

As Americans, we are familiar with soybean oil, but it's hardly the only oil we use. Palm oil, for instance, while little known, actually appears in lots of things we use. Palm oil is versatile and cheap. It produces the largest amount of energy per unit volume when burned of all vegetable oils, allowing it to be used both for fuel and food: It is burned for electricity generation in the Netherlands and is a keen substitute for diesel fuel in Europe. In your house, chances are your chocolate, toothpaste and potato chips all contain palm oil.

Palm oil is currently less expensive than soybean oil - in fact you can track the ratio of palm oil to soybean oil on Bloomberg. But it is not just palm oil that affects soybean oil prices. There are a number of edible oils traded around the world. Soybean and palm oil just happen to have the lion's share of production. But as the price of one rises, consumers flood to the next oil, and vice versa.

The Fallout

Just as quickly as soybeans, soybean oil and palm oil hit their record highs, the sell-offs began. Besides profit taking by financial players, the rumor began to circulate in the market that the No. 1 soybean importer [China] was going to "do something" about rising food prices. China's January inflation rose the fastest in 11 years. By Friday it was confirmed that China was going to dip into the strategic oil reserve - the vegetable one. Yes, China has edible oil reserves and is not afraid to use them. (One province requires all cities to hold a 10-day supply of edible oil in reserve.)

These types of measures are not isolated to China. Bangladesh, which is completely dependent on the import of crude vegetable oils to meet its local refining demand, recently banned the export of refined soybean and palm oils for six months. Domestic vegetable oil prices had risen 37% over the past six months, so they cracked the Econ 101 textbook and read: Stop exports, increase domestic supply, and watch domestic prices drop. It's not "See Jane Run," but it's still in the book.

Prices have fallen, but they are by no means headed into ripcord-broken freefall. Ponder these:

• China may be using its edible oil reserves now, but it will need to import more soybeans and soybean oil (as well as other oils) to fill those reserves back up. They can’t do it with domestic supply.
• Demand for soybeans, soybean oil and all other edible oils continue to rise due to changes in eating habits (more wealth = fried food. Scary but true).
• Biofuels continue to grow in importance, putting pressure on both soybean and palm oil.

In other words: Hang on tight … this ride ain’t over yet.

Links
USDA Oilseeds: World Markets and Trade February 2008

Comments

[sbenard]

While I agree that the long-term soybean bull has much further to run, I'd like to see some ETFs developed to short commodities. Soybean prices are down 6 of the past 7 days, and prices have closed below the 8-period Exponential Moving Average the past 5 consecutive days.
If the ETF/ETN cos would create more funds to short these commodities, I could trade the trends in both directions in my IRA. Perhaps as a community, we can encourage them in this direction by contacting them by email and asking them to consider some short commodities funds.

[silverharp]

www.etfsecurities.com/.../

I shorted Soybeans using the above ETC last week

[staples]

Curious...how are you doing with the shorting soybean commodities ETF?

OK, going the other way, what are good way to play soybeans in a bullish way. I wish I could remember her name,but an English girl was on CNBC one morning and said with all the corn being planted for food and ethanol, she is mowing down her corn to put in soybeans. Let's just say she made sense to me.

Not a lot of experience on commodities market,would appreciate some advice on some plays.

Only one I am aware of is MOO. That is a word wide AGR ETF. Covers alot, I am more interested in just the beanies!
Thanks

Staples