Fund Selling in Ag Markets Drives Soybean Oil Sharply Lower

Soybean oil futures were battered on Friday, as speculative liquidation of soybean futures hit a fever pitch. An improvement in crop conditions, as reported by the Rosario Grain Exchange, triggered the largest single-day decline in soybean futures since 2015. However, oil/meal spreading limited the decline in soybean oil futures to 2 3/4 percent or less (March contract -116 basis points per pound), with the liquidation of bull spreads supporting the back-end of the curve. While the improvement in the Argentine crop conditions was significant, the outlook remains tenuous and timely rainfall, projected for next week, will need to occur to limit crop stress. The crop is still in the early stages of development, so weather conditions in the next six to eight weeks will play a substantial role in the direction of soybean and soybean oil futures. Still, fund liquidation can drive prices above or below fair value. While the recent liquidation could provide buyers if conditions continue to deteriorate, many traders will be hesitant to re-establish substantial long positions until they know more about yields.

Palm oil futures were also lower. However, concerns about output in January continued to support the front end of the curve (March contract +25 ringgit per tonne), while concerns about slowing world demand weighed on summer contracts (July contract -25 ringgit). Cargo surveyor data indicated Malaysian shipments fell more than 40 percent during the first 20 days of January from the same period in December. The sharp decline is due, in part, to a shift in the relative export taxes, resulting in a price advantage for Indonesian palm oil. There has been some speculation that the Indonesian government could raise its tax rate in February, potentially shifting the exports back to Malaysia. However, palm oil futures are likely to remain under pressure until Chinese and Indian buyers return to the market to restock.

The relative moves drove the spread between soybean oil and palm oil futures below four cents per pound, after peaking at 5.4 cents on Wednesday. The Jacobsen believes the spread will likely continue to move lower, but a short-term bounce in soybean futures following the large drop could support soybean oil prices on Monday.

The large declines in soybean oil futures also reversed the recent move higher in the spread between soybean oil and heating oil futures (HOBO). However, the March HOBO spread remained above $1.60 per gallon and up more than 500 percent from just above 31 cents last year. The Jacobsen expects strength in energy prices to drive the spread lower in 2021 but believes there is a potential to test the high above $1.80 before the spread moves meaningfully lower.