What is the Deal with Soybean Meal?

TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS ANDMAY NOT BE SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES.

Soybean meal has been on a tear to the upside since the beginning of February and is now almost $60 off of the January lows. Missed rains in Argentina and short covering by the commercial has fueled the fire. Strength in meal has also helped soybean prices recover dramatically from a mostly bearish USDA report. The question is how long will this meal deal last?

In the February USDA monthly supply and demand report the USDA dropped soybean exports significantly leaving soybeans with a 530 million bushel carry over. This was much larger than the trade expected, yet soybeans found a reason to close higher on the day. Why? Soybean meal.

Soybean meal was sharply higher on the report because the USDA did not increase the soybean crush from the previous 1.950 billion bushel forecast. Now, the USDA did not illiterate why they left the crush unchanged but pretty quickly concerns started to swirl around that maybe they left it unchanged because with a new record crush by 51 million bushels we may be reaching capacity. This is significant because of what is happening in Argentina.

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While the USDA left USdomestic crush unchanged they did lower the Argentinian soybean production estimate by 2 million metric tons (to 54 million) due to "lower harvested area and reduced yields resulting from periods of unseasonable warmth and dryness". For soybeans, this is almost a non-event as the USDA also increased Brazil production by an equivalent 2 million metric tons. But the curious thing is that the USDA also lowered global crush by 1 million metric tons and didn't give a reason why... Hmmm. Is this because of lower meal demand or because we will struggle to make up for the loss of theArgentinian crush?

It may be difficult to argue that global demand for meal is slowing down. We are feeding lots of animals and US exports of meal have been very good lately. The fear is that we might not have the capacity (globally) to make up for Argentina who is the largest exporter of soybean meal in the world, expected to provide almost 47% of global exports.In comparison, the US and Brazil combined are expected to account for roughly 40% of global meal exports. So, when Argentina missed out on much needed rains last weekend the meal deal hit a fever pitch. Many analysts are now starting to lower their Argentinian production estimate. Does this mean soybean meal (and soybean) prices are off to the moon?

The tricky part here is trying to figure out what US and global crush capacities are. While I do not think we have hit peak capacity I do recognize that we might not be too far off. So, while I do think that a shortage in the Argentinian crop could mean more soybean meal exports for the US we may be able to pick up some of the slack without the need for dramatic price rationing like we are currently seeing.

There is also the matter of Brazil. How much more capacity will Brazil have to pick up the slack once their current crop is harvested. And, while estimates for Argentinean production is falling expectations for Brazil have been increasing. Argentina could (and has in the past) imported soybeans from Brazil and could still tap into their vast crush capacity. This could add some cost on the global market but it may not be nearly as significant as what the market has already priced in.

Speaking of Argentina's vast capacity... There is also the matter of soybean stocks in Argentina. They hoard soybeans. Coming into this current growing season the USDA has Argentina's stocks estimated at over 36 million metric tons, that's almost a whole year's crop. For comparison, China (who is seen as a soybean hoarder) is projected to have about 20 million metric tons of soybean stocks while the US is estimated at a little over 8 million metric tons. This means that Argentina has, before this crop even got planted, more soybeans than the US and China combined. They control almost 38% of the worlds soybean reserves.

Argentina could dip into their reserves to offset any reduction in their production and carry on business as usual. The question is will they? Argentina has traditionally stored huge amounts of soybeans as an inflation hedge. And it has worked well. However, with the ArgentineanPeso at rather low levels, at what point do you cash in a hedge? It will be interesting to see what they do, but one way or another I doubt they let their vast arsenal ofsoybean processing facilities go idle especially if meal prices stay strong.

On a side note, the recent strength in soybeans may be causing more harm than good. For whatever reason, call it poor quality or limited global crush capacity, export demand has been stronger for US soybean products lately than soybeans. So, higher prices in meal may be a problem if we price ourselves out of the global market. Even worse we may be making an already difficult soybean export situation even worse. It is hard to imagine thathigher pricesare not adding more bushels to the (already bloated)domestic balance sheet.

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Give us a call if you would like more info on the strategies we are using or if you would like to set up an account to put a plan in action. Ted Seifried - (312) 277-0113. Also, feel free to give me a call or shoot me an email if you would like to talk about your marketing plan, the markets, weather, or just to visit.Follow me on twitter @thetedspread if you like.

March Corn Daily chart:

MarchSoybeans Daily chart:

MarchWheat Dailychart:

Producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.

In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!

Ted Seifried (312) 277-0113 or tseifried@zaner.com

Additional charts, studies, and more of my commentary can be found at: http://markethead.com/2.0/free_trial.asp?ap=tseifrie

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