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Todd's Take                   10/15 05:00

   It Bears Repeating: Soybean Meal Prices Are Cheap

   Every now and then, events cause traders to lose a sense of value. This 
fall, that has happened in soybean meal.

Todd Hultman
DTN Lead Analyst

   According to the U.S. Labor Department, U.S. consumer prices were up 5.4% in 
September from a year ago and energy prices were up 24.8% from a year ago. All 
around us, we are hearing about a threat of rising prices and difficulties 
obtaining supplies, from fertilizer to used cars, to semiconductor chips to you 
name it. Even purchases of toilet paper are being limited again.

   There is one commodity in the grain sector, however, that seems to be 
readily available and is bucking the trend of rising prices. Soybean meal, the 
widely popular feed ingredient that has experienced strong demand for over 30 
years, became the first unlikely bear in a bull market in June of this year, 
and has proceeded to fall to its lowest prices in over a year, settling at 
$314.10 per short ton on Thursday, Oct. 14.

   You may recall I wrote about meal one month ago, making a case for why it 
should have had support near $340 per short ton. Not only has it gotten cheaper 
since then, meal has also become cheap in comparison to that other popular feed 
ingredient, corn. The two are not the same and corn is priced in dollars per 
bushel, while meal is priced in dollars per short ton. When we compare the two, 
we see a consistent relationship over the years. Currently, meal prices are at 
their lowest level compared to corn since 2013 -- another sign of attractive 
value.

   Fundamentally, the deep dive in meal prices is difficult to explain as spot 
meal's low during the depths of the initial pandemic was $280 in June, not much 
lower than now, at a time when the outlook for demand looked extremely bleak -- 
no one knew how long it would be before people would go out and interact again.

   Today, just over a year later, COVID-19 is still a concern and restaurants 
are struggling, but overall, the economy is much more vibrant than it was. 
Demand has rebounded so rapidly that production has not been able to keep up, 
and the result has been rising prices and shortages of all kinds of goods.

   One of the unlikely bullish winners of 2020 and 2021 was the vegetable oil 
sector. To protect itself from COVID-19, Malaysia blocked immigrants from 
entering the country, but that also made it difficult to produce palm oil 
without a labor force. Demand for palm oil, however, quickly rebounded and 
sparked a rally in the vegetable oil sector, including soybean oil.

   Drought hurt U.S. soybean production in the northwestern Midwest and damaged 
canola crops in Canada. China added more fuel to soybean oil's bullish fire, 
buying 1.31 billion bushels of soybeans from the U.S. in 2020-21 and leaving 
U.S. domestic supplies in a tight predicament.  

   If all the above wasn't enough, demand for soybean oil ratcheted even higher 
in 2021 on prospects that biodiesel would find favor with a new administration 
seeking to bolster investment in clean energy. The jury is still out on that 
one, but bean oil has found support from rising crude oil prices as the world 
economy continues to show improvement.

   Traditionally, soybean meal has been the driver of the decision to crush 
soybeans and, for many years, the result was large inventories of unused 
soybean oil that would be sold off at cheap prices. Since the pandemic, the 
tables have turned and it has been bean oil driving the crush decisions.

   The strange thing is actual demand prospects for meal also remain strong. 
USDA estimates world demand for meal will be up 3.2% in 2021-21. Demand in 
China, the world's largest consumer of meal, is expected to be up 4.3%. Meal 
may not be driving the crush decisions these days, but it won't be piling up 
unused in some corner either. Meal is a fantastic feed ingredient that benefits 
from rising world incomes, especially China's rising income.

   So why are meal prices being treated like a modern leper?

   As is often the case when market prices get distorted, I suspect the sudden 
popularity of bean oil over meal has caused spread traders to take on too much 
of a good thing and has driven meal prices lower than they deserve.

   In the real world, U.S. ending soybean supplies are estimated at 320 million 
bushels for 2021-22, a comfortable but not excessive amount. There is plenty of 
uncertainty in the season ahead and we have not yet seen China's demand, but 
early indications look promising.

   As usual, I can't guarantee soybean meal prices will go up from here, but 
for a wide variety of producers who need to buy meal for their feed mix, I have 
to point out that you are currently being offered the cheapest prices in over a 
year. Given the current fundamentals, the only thing more bullish at this point 
would be to see commercial positions turn net long.  

   **

   Comments above are for educational purposes only and are not meant as 
specific trade recommendations. The buying and selling of grain or grain 
futures or options involve substantial risk and are not suitable for everyone.

   Todd Hultman can be reached at Todd.Hultman@dtn.com

   Follow him on Twitter @ToddHultman1




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