May 28, 2016

Hold Off On Buying Soybean Meal

 |  By: Anna-Lisa Laca

This week, July soybean meal made its first move over $400 per ton in 2016. While ProFarmer’s Chip Flory and Brian Grete largely believe the rally is being driven by the funds, they say farmers should go ahead and take advantage of this rally. But Flory and Grete has different advice for feed buyers, who should probably wait this one out.

The two say the fundamentals and structure of the current soybean rally indicates is being driven by the funds. “The interesting thing is the futures [are moving], but the cash isn’t really participating,” Grete says. “We’ve got a big variance between the futures and the basis. It really smells like it is funds-led.”

Flory says it could be the result of a squeeze, but in the age of electronic trading, that’s not likely.

Instead, synthetic crushers are helping drive this rally, according to Flory. “The strength in soybean meal futures has really dressed up the synthetic crush,” he says.

Crushers can buy the beans, sell the meal, sell the oil and they make money, but the cash market is a different situation.

“When you don’t see the cash market participate, it gives you the impression that the demand isn’t as strong as the synthetic demand would indicate,” Grete explains. “As the result, you’ve got the crusher wanting to crush as much as possible.”

Grete says all that product could end up being an oversupply for crushers eventually down the road, which could lead to potential issues for the market.  

According to Flory, late rains in on a harvest-ready bean crop, along with quality and volume concerns in Argentina,could have something to do with the climbing soybean meal price.

“Undoubtedly, there is some component of that,” Grete admits. “It’s just that when you look at fundamentals and how the cash market has responded compared to the futures, it gives the impression that the funds have driven this more than the actual physical demand.”

What should you do?

Use this rally to your advantage. “The speculator brings volatility to the market, and volatility increases opportunity,” Grete says. “I think you have to be a seller here.”

If you’re a feed buyer, Grete says you should probably wait. “Normally when basis stings, we tell feeders to go ahead and buy the meal on the cash market,” Flory says. “But it looks like basis could get even worse on meal.”

Lower meal prices could be ahead for soybean meal. “If we do get some of those supplies backing up and not coming out quickly enough, look for basis to soften even more and it could be a better buying opportunity,” Grete adds.

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