The long soybean meal/short soybean oil trade could become more popular in the short term as the demand for soybean oil plunges from the biofuel industry. At the same time, concerns about the availability of soybean meal from Argentina and slowing DDG output could increase the demand for U.S. soybean meal both domestically and in export markets.
Chinese crushers, which are already slowing production due to soybean shortages, are fearful that additional logistical delays or bans on exports in Argentina and Brazil could reduce imports of soybeans. The slowdown, which started with delays in Brazilian harvesting due to excessive rainfall, is happening at a time when pork production is just beginning to recover from the African Swine Fever (ASF) epidemic. Crush margins are already reflecting the shortage with the margin in the Shandong province rising to 360 yuan per tonne ($1.38 per bushel) on Monday, which is the highest level in the last eight years.
Another potential disruption in soybean and soybean meal shipments may occur in Argentina, where farmers are harvesting the latest crop. A grain inspectors’ union is asking the government to suspend operations at the port for 15 days to help fight the coronavirus outbreak. However, agricultural exports are the primary source of revenue for the Argentine government, which is trying to avoid defaulting on $100 billion in debt, so a shutdown seems unlikely.
Even if the government does not shut down the port, logistical delays, due to restrictions enacted by municipal governments on movement throughout the country, are already delaying deliveries of recently harvested soybeans to crushing facilities along the Parana River. The slowdown in crushing activity likely contributed to the marketing-year high in export sales of U.S. soybean oil during the week ending March 19, which was reported by the United States Department of Agriculture (USDA) Thursday morning.
These developments have contributed to the pressure on oil share over the last two weeks. During that time, the oil share traded down three percent to 28 percent on Monday before rallying back above 29 percent on Wednesday. In the last 48 years, the 28-percent level has been the effective floor for the oil share, with the continuous most active contract chart indicating very short-term declines below that level, but no drop below 27.7 percent.
In 1973 the oil share dropped below 20 percent in June before shooting up above 55 percent within a year. Given the current fundamentals, it seems unlikely oil share will rally that sharply over the next year, but if soybean meal supplies become scarce, oil share could break the 28 percent level.