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Soybean oil futures: can they build on fantastic first half?

You may be thinking copper and oil have had a great first half of the year, but spare a thought for the soybean oil market, where futures prices have been on a tear over the last six months.

The price of soybean oil has more than tripled in 12 months with spectacular momentum in the CFD market. Spot prices were around the 20 bucks mark in early July last year, and they are now trading at over $64. Prices have been even higher although we have seen a recent short term correction.

The recent reverse from highs of around $74 is arguably the biggest in this market in a year. It begs a couple of questions for traders. What has been driving the price, and will this continue, and what was behind the recent sell-off in June, and what does that mean?

Soybean Oil price drivers

One of the big drivers has been the use of soybean oil as a component of biodiesel, especially in the South American market. In April the government in Brazil cut the biodiesel blend in diesel from 13% down to 10%. Brazil’s Ministry of Mines and Energy has said this reduction will now extend until August at the earliest.

This appears to be a major factor in global soybean oil prices but the big question remains whether this will now see surplus flow being re-directed into the global market. Argentina is also known to be contemplating a reduction in the biodiesel blend (like Brazil, inflation seems to be a factor here), which could mean a surge in soybean oil exports onto the international market from producers there.

Aneeka Gupta, Director of Research at WisdomTree commented “Soybean oil’s stellar price performance has largely been predicated on demand for biodiesel. The Environmental Protection Agency is set to propose renewable fuel requirements within weeks. The targets will dictate how much corn-based ethanol, biodiesel and other renewable fuel oils refiners must blend into their products in 2021 and 2022. The US government is discussing options to provide some relief to refiners on the biofuel blending mandate. Any support measure for refiners to reduce the biodiesel content of fuel could result in weaker demand for soybean oil in the medium term.

Local prices in South America – e.g. Argentina’s FOB Up River price for soybean oil – have been even more dynamic than the spot price in the US. According to Platts data, prices were up over 120% in 12 months in Argentina.

Demand set to grow

Does this mean we will see further corrections in futures prices in 2H? Biofuels seem to be the name of the game here. The US Department of Agriculture has said it expects biofuels will consumer 12bn pounds of soybean oil in the 2021-22 marketing year, this is up from an estimated 9.5bn pounds last year. Production capacity for soy oil is also growing fast as the Biden administration commits the US economy to severely reducing carbon emissions by 2030. StoneX Group recently estimated that US soyoil production capacity will hit 2bn gallons annually by 2023.

Several major agriculture companies are beefing up their processing capability in response to all this: ADM said it was investing $350m into a new soybean crushing plant in North Dakota which would be ready for the 2023 harvest and could process 150,000 barrels per day. And Cargill is spending $475m on improving its own soy bean crushing plants in seven US states, along with a new renewable diesel plant in Nebraska.

All in all things still look positive for soybean oil. We anticipate more South American product hitting the market in 2H which could apply some short term pressure on prices, but the great shift to zero carbon is going to be a massive factor in this market which we simply have not seen before. If what AMC and Cargill are up to is anything to go by, demand for soybean oil is going to remain strong well into 2022.

Explore Soybean Oil ETFs

Product Name ISIN Exchange Ticker Listing Currency
WisdomTree Soybean Oil
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | Charles Stanley Direct | EQi

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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