Market Speculation Puts Soybean Oil Prices on Roller Coaster Ride

GMO Dusan Kostic/Adobe Stock

Spend Matters welcomes this guest post from Jonathan Stokes, market analyst at Mintec.

We, as analysts, steer the market more than we like to think. A prediction or forecast one way or another can be a significant factor in driving commodity pricing. During the summer, the USDA did exactly this, surprising markets when they forecast higher US soybean production, despite adverse weather conditions throughout the crop development period. So when market prices of soybean and soybean oil shot up at the beginning of October due to the downward revisions of USDA production estimates, what went wrong?

Adverse hot and dry weather across the Midwest pushed prices up in August, as market experts forecast lower yields and a difficult season ahead. Prices began falling again throughout September, however, as the USDA went against the grain and forecasted a record crop.

Dismissive of the poor weather, the USDA attributed increased production outlooks to a record high acreage, climbing by 8% year-over-year to 90.2 million acres, as farmers planted more soybean in South Dakota, Kansas and Illinois. As a result, production was forecast up 2% y-o-y to 119.2 million tons, 2 million tons higher than the previous season’s record harvests.

But signs already indicated that record acreage might not develop into record production. By July, 65% of US soybean crops had reached the stage of pod development, with improved rainfall vital for soybean growth in order to prevent yield falls.

In October, the USDA revised its production forecasts down 9% from their August estimates, causing soybean and soybean oil prices to rise. Yields had fallen not only due to adverse weather during the summer but also as a result of further adverse weather during harvesting. Heavy rains meant the soybean harvest was only 36% complete at the beginning of October, 43% below the five-year average.

Prices faced even more unexpected pressure when the supply of soybeans from 2016/2017’s record harvest tightened. Domestic and export demand rose, leaving stocks 12% lower month-over-month at 8.2 million tons in October.

As we move into the 2017/2018 season with lower than-expected production and stocks, and with US legislation placing high tariffs on biodiesel imports, can we expect rising prices and a tightening supply outlook ahead?

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