On June 10, soybean prices started coming down from their highs from the first half of the year, driven by a decrease in crude oil prices and the end of the vegetable oil ban out of Indonesia. This seemed like cause for celebration for soybean meal consumers in anticipation of lower soymeal prices. Instead, prices for soybean meal mostly stayed the same, even rising a little. Why? How can you set a pricing strategy when the price of soymeal seems so irrational?

The answer lies in understanding the relationship among soybeans and its two products, soybean oil and soymeal. The current pricing trends serve as a case study on the importance of understanding the factors underlying the price of soymeal and why any changes in soybean prices may not be fully reflected in soymeal prices.

 

Oversupply for Soymeal Already Pushed Soymeal Prices Down

 

Let’s talk theory. Assume that soybean oil is more valuable in the market than soybean meal (“soybean oil leads soymeal”). The market creates enough soybean oil to meet market demand and—as a result—creates an oversupply of soymeal, because you can’t make one without the other. The impact on price? Soybeans and soybean oil prices rise while soymeal prices fall on the glut in the market. So what happens if demand for soybean oil falls while soymeal demand remains the same? Production falls upon reduced soybean oil demand, and soybean and soybean prices fall. In the meantime, soymeal supply has tightened while demand remains unchanged, causing soymeal prices to rise . And there you go—soybean prices fall and soymeal prices rise. At least theoretically. However, this tracks with what we actually experienced with soybean and soymeal prices the first half of the year.

Historically, soybean oil has tended to trail demand for soymeal, with its value trading around 35-38% of the CBOT Board Crush (gross margin of the products). For the past year, oil share had been pressing into the low 40s. It then shot up to around 50% in May, driven by the increased demand for biofuel, the vegetable oil shortages out of Ukraine and Indonesia, and drought conditions in South America and Canada. Atypically, the volume of soybeans necessary to meet soybean oil demand created an oversupply of soymeal, triggering the lower soymeal prices we’ve seen since the March high.

As the market for soybean oil loosened and prices fell for soybeans and soybean oil in June, their prices fell alongside reduced production of soybean oil and soymeal. Thus, less soymeal was available in the market and soymeal prices rose. Bear in mind that a lot of factors can play into price. Still, supply and demand can help us understand the interplay of prices between soybeans and its products.

 

Soymeal Prices Will Reflect Soybean Prices When Soymeal’s Crush Share Rises Enough

 

Given the changes brought about by our current energy crisis, it’s likely that the demand for biofuel may create a longer-term shift in the soybean oil share of the CBOT Board Crush. Does this imply, structurally, that soybean oil will now lead demand for soybeans and that soymeal prices will continue to lag behind soybean oil and soybeans? Not necessarily—it won’t take much for the value of soymeal to represent a higher percentage of the crush margin of processed soybeans (and, therefore, a higher percent value of the soybeans).

Earlier, we discussed that soybean oil has typically followed demand for soymeal, with its value historically trading around 35-38% of the CBOT Board Crush (gross margin of the products). Even before the war in Ukraine and Indonesian vegetable oil retraction, the share of soybean oil was already in the mid-40s. As you can see in chart A, prices for soybean oil (blue line) and soymeal (red line) tracked closely until around December, when soymeal began leading soybean oil, and—as you’d expect—soybean oil prices fell and soymeal prices rose. Of importance, this increase in value to soymeal happened as the share of soybean oil fell to 41%. On a relative basis, prices of products then rose together closely, until soybean oil prices rose and soymeal prices fell in March with an oil share around 50%.

 

Think about the implications for us today. Soybean oil share has fallen to about 44% since the high, and we know from the chart that a modest break down to 41% could see soymeal values become stronger relative to soybean prices. This is because the value of soymeal would represent a higher percentage of the crush margin of processed soybeans and, therefore, a higher percent value of the soybeans.

 

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With that in mind, take a look at chart B (shown below), which shows the relationship between soybeans and soymeal. Over the course of the past half year, soymeal and soybean prices began converging, until soymeal value began lagging soybeans. This is on the heels of continued strength in the soybean oil share. If soybean oil share falls to 41%, soymeal would take on more value and we could expect to see a strengthening in soymeal relative to soybeans.

 

In other words, with just a modest break in soybean oil share, you could expect rising prices for meal relative to soybean prices.

 

What Are the Factors that Could See Soymeal Prices Moving Up or Down?

 

Now that you have an underlying sense of the relationship between soybeans, soymeal and soybean oil, it’s easier to assess the potential impact of market changes on prices of all three.

What if there’s a bumper crop for soybeans?

It’s a fool’s game to forecast a bumper crop too early. If one is on the horizon, expect downward pressure on soybeans and its two products, soymeal and soybean oil. However, this will also drive soybean prices to fall faster than its products, which will drive crush margins higher.

What if crush margins go higher?

If the crush margins rise, the values of meal and oil rise faster than that of beans, and fall more slowly than beans.

What if soymeal demand changes?

Soymeal continues to be the preferred protein source for livestock, and the inelastic demand nature of soymeal demand implies relatively little impact on amount consumed based on soymeal price. Indeed, in spite of the increased supply from excess production in the U.S., USDA May Oilseeds report anticipates that next year’s demand will rise 3%, muting the potential for soymeal price decreases. Might soymeal prices increase based on this? Only if demand exceeds current soybean supply. This would increase the price of both soybeans and soymeal.

Should We Expect Easing of Biodiesel Mandates Overseas and a Significant Downward Impact on Soybean Prices?

We anticipate that industrial oil demand worldwide may lessen due to the lessening of biodiesel mandates. Indeed, according to the USDA June 2022 Oilseeds report, industrial oil demand in Brazil, for instance, is forecast to decrease by two-thirds due to the easing of the biodiesel mandate. Nonetheless, U.S. industrial energy usage is anticipated to rise by 28% in 2022/23, accounting for all projected consumption growth. All of this leads to a potential increase, not decrease, in soybean prices and continued excess production of soymeal (and continued dampened soymeal prices relative to soybean prices).

 

Setting Your Strategy for Soymeal Purchases

 

Upcoming events in the soybean market—even ones that seem like they would have a bearish impact on soymeal prices—may not have the impact one would anticipate because of the interplay between the products of soybeans and other anticipated market forces. As a smart purchaser of soymeal, be aware of overproduction (or underproduction) of soymeal; the soybean oil share; the impact of supply and demand on soybeans and its products. In summation, be vigilant on assessing the market and make buying decisions that are reasonably priced to maintain profitability.

At Total Farm Marketing, we remain committed to monitoring the market and helping you make decisions to benefit your farm and your overall profitability.

 

If you have questions on how we can help, reach out to one of our consultants at 800.334.9779 or visit us at TotalFarmMarketing.com.