Soymeal futures at 8-year highs, further upside on the radar
Front month soymeal futures reached an eight-year high on Friday, posting $499.1/st in the latest in a string of strong prices to hit the contract as it reflects lurking supply fears against the backdrop of Argentina's persistent drought.
On the back of the latest rally, some market participants have been pondering how much further soymeal prices can rally, amid fears that the full upside may not be over yet.
“We will have to wait for USDA’s February and March supply and demand reports, but there might be further upside to the March contract,” Futures International's Terry Reilly told Agricensus.
According to Reilly, cash and futures traders have more of an upside than a downside view on soymeal prices at the moment.
The March, May and July 2023 CME soymeal futures contracts traded at the highest levels since they were launched during the week.
Soymeal prices have been supported by two main factors since the end of 2022.
The first was linked to the play of product spreading dynamics whereby soymeal and soyoil prices move in opposite directions.
The sharp drop in soyoil prices between the last days of November and early December supported soymeal prices, with a parallel reduction in the US oil share that measures how much of the proceeds from soybean crushing comes from soyoil sales.
The second important factor that has been supporting soymeal prices is the severe drought that is threatening to slash Argentina’s soybean crop and, hence, dampen its crushing activity and consequently its soymeal and soyoil output.
Upside
Soymeal futures had a sharp upswing Monday and, after a downward correction Tuesday, the rally continued through the remainder of the week while market participants believe the upside to soymeal prices – and the downside to the oil share – may not be over yet.
“CME soyoil futures continue to dwindle in a broader term with the key headline support of 38% oil share under threat,” Anilkumar Bagani, research head at Mumbai-based vegetable oil broker Sunvin Group, told Agricensus.
According to Bagani, while the meal share borrows strength from the drought in Argentina, the lower-than-expected US biofuel blending mandates proposed by the US Environmental Protection Agency (EPA) in December has “reduced the soyoil utility as a biofuel feedstock.”
“I still feel there is more room for further reduction in the oil share at least up to end-March as US soyoil stocks are estimated to increase further while the usual US soyoil export is lacklustre due to its premium over South American offerings,” Bagani added.
The US oil share for the March CME contract was above 45% in mid-November before declining steadily to just over 35% at the time of writing.
Slow burn
Soymeal future contracts for delivery during the current marketing year started being traded around the end of 2020 with the March contract valued below $350/st.
After oscillating between $320/st and $370/st for almost a year, the March soymeal contract had a steep upsurge from October 2021 and February 2022 as the soybean complex as a whole soared.
From February to November 2022 the contract moved in a tight band around $30/st above or below the $400/st level before facing another sharp uplift in the last days of November and beginning of December underpinned by product spreading dynamics.
On December 1, the EPA published US biofuel blending mandates for the upcoming years, with figures falling short of market expectations.
With lower soyoil demand prospects, soyoil futures plummeted, which supported soymeal quotations insofar as less soybeans being crushed to produce soyoil tend to reduce the soymeal output.
After a steep upswing in soymeal futures between November 30 and December 9 the uptrend continued, albeit at a less intense pace, due to mounting weather-related concerns in Argentina.
The South American country has been facing a severe drought since soybeans started being planted in 2022.
As the season advanced and moisture levels and rain forecasts did not improve, global soymeal prices were pressured higher as lower soybean availability in Argentina, the world’s largest soymeal and soyoil exporter, tends to reduce domestic crush levels and exports of by-products.
Soymeal futures prices are already at historically high levels, with front-month contracts on a rolling basis having breached an eight-year high Friday to trade at the highest level since June 2014.
This is a key factor that can cap the upswing to soymeal prices ahead.
That said, prices may find further support if rains do not bring sufficient relief to drought conditions in Argentina – which could also mean further downside to the US oil share.