Since the post-pandemic lows in April 2020, the Goldman Sachs Commodity Index (GSG), a popular index used to track commodity prices, has risen approximately 250%. At the same time, globally, we are experiencing an inflationary environment with rising prices for food, energy, housing, clothing, etc.
These high prices are weather issues impacting crops, high energy prices, rising labor costs, a strong US Dollar, global post-pandemic recoveries, excessive cash in the monetary system from the pandemic era, strong housing market demand, and a few government regulations.
As the commodity supercycle continued to erode from its peak in June 2022, the ramifications are beginning to appear in market prices. The market maxim, "The cure for high commodity prices is high commodity prices," continues to reign.
When commodity prices make these significant increases, eventually, the consumer begins to use less of the products or finds substitutes, thereby reducing demand which ultimately results in more supply. Another prominent event is that producers of these commodities see opportunities for profit increases and begin to produce excessive amounts increasing supply at a pace that outweighs demand. Both of these factors contribute to higher prices cure higher prices.
During the 2022/23 soybean growing season, parts of South America and the US were experiencing a severe weather pattern causing drought conditions and higher prices based on a shortage of carry-over crops for the next season.
As the markets look ahead to the 2023/24 growing season, there has been a significant change in the soybean forecast. While Argentina had a lower-than-expected soybean yield, Brazil, the world's largest soybean producer, had a bumper crop resulting in an overall South American soybean production of 6% for the 2022/23 crop season.
The United States Department of Agriculture (USDA) reported that production for the 2023/24 marketing year (MY) is projected to climb by more than 5 percent to a record high of 4.5 billion bushels based on higher yield and marginally higher planted area.
Soybean Oil
Soybean oil is a by-product of soybeans, and the projected increase in soybean production has begun to weigh on soybean oil prices. Adding to this supply issue is the economy of the world's largest soybean oil producer; China is faltering and showing no signs of exponential growth as it experienced in the past. China is the largest soybean export customer of the US and has reached deals with Brazil to make purchases in their local currencies instead of the US Dollar. Only when China's economy runs on all cylinders will the demand for global soybeans from the largest soybean oil producer be strong.
Seasonal Pattern
Source: Moore Research Center, Inc. (MRCI)
I recently wrote an article for Barchart, "2023 Bumper Corn Crop?" discussing how a reliable seasonal rally failed to appear this year, resulting in expectations for much lower corn prices. The same event occurred in the soybean oil market, resulting in a consistent downtrend.
Soybean oil traditionally peaks in March and begins its seasonal decline. Reviewing MRCIs research, we see that June usually finishes lower than it started, indicating more price weakness ahead. Typically when a reliable seasonal pattern fails to materialize, the market retraces in the opposite direction significantly. Soybean oil began its seasonal rally in September and peaked in November, several months earlier than usual.
The Commitment of Traders (COT) Report
The COT report, in the tabular form published on Barchart.com, illustrates that managed money now has more short positions than ever in the past 52 weeks. Looking to the right on the soybean oil line, we see that managed money has consistently added to their short positions for several weeks.
The daily July soybean oil chart shows that managed money (blue line) is at its lowest point of the past 52 weeks. Managed money traders are trend followers, confirmed by the high correlation between price direction and the blue line direction.
Managed money remained net long soybean oil until March 03, 2023 (red vertical line), when they flipped to being net short (more shorts than longs.) The significance of the flip is how the market found excess supply waiting for it when the price returned to the vicinity (blue box), where they flipped.
In the past year, managed money held slightly over 100k more longs than shorts. This new downtrend shows they only have 36K more shorts than longs. They have considerable capital to pursue this downtrend at their disposal.
In closing…..
The surprise reports from the USDA suggest a significant increase in global corn and soybean production for the 2023/24 growing season, contributing to a failed seasonal price rally for 2022/23 products. As traders look forward, they will begin monitoring weather conditions, especially during July and August, as this is the following variable that could counter the USDAs projections.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
