Soybean Oil: Move Over Crude, There’s A New Oil In Town by Attain Capital
Move over Crude oil, there’s another oily commodity market that’s doing it’s own swan dive of late. Who? None other than good ‘ol Soybean Oil.
Crude Oil not that the only #oil getting crushed. $ZL_F $SOYO pic.twitter.com/yw1Lhz1vMm
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Lee Ainslie's Maverick Capital had a difficult third quarter, although many hedge funds did. The quarter ended with the S&P 500's worst month since the beginning of the COVID pandemic. Q3 2021 hedge fund letters, conferences and more Maverick fund returns Maverick USA was down 11.6% for the third quarter, bringing its year-to-date return to Read More
It has since rebounded a little since then, but a -14% drop doesn’t quite live up to the -50% drop seen in Crude, but it’s certainly worth mentioning. And believe it or not, you might use Soybean Oil nearly as much as you use Crude Oil every day. We’re talking baked goods, salad dressings, and more which use vegetable oil, which usually has as its main ingredient – Soybean Oil (mind blown). Naturally, to get Soybean Oil, one must do something to the Soybean itself – do you ‘oil’ a Soybean the same way you ‘milk’ a cow? No, you crush the Soybean – and end up with two parts, Soybean Meal and a byproduct – Soybean Oil. Just think of another legume, peanuts, and what happens to a jar of natural peanut butter if it sits for a while…all that oil on the top… and you can imagine how a bunch of oil is locked up inside those beans.
And yes, of course, there are futures markets on Soybeans – and their products, Soybean Oil and Soybean Meal – and whole trading strategies built around trading the so called ‘Crush Spread’, buying the meal, selling the oil, and so forth. However, just because they all come from the Soybean – doesn’t mean all of the markets move together in lockstep. We looked back at the cash price of Soybeans, and Soybean Oil, and it turns out the correlation isn’t as high as you might expect, with some nasty moves into negatively correlated territory.
(Disclaimer: Past performance is not necessarily indicative of future results)
The 10 year correlation comes out to be +0.25… which really isn’t that high for a market that’s completely dependent on the other futures market. How could that be…. Well, one of the reasons is you grow the Soybeans at a certain time, but they can be crushed at different times, and that the Oil can last longer than the bean itself – so there’s a bit of a mismatch in the deliverability of each. The markets can also have different return drivers and other outside global policies that could affect the oil and not the crop itself. The most recent case, The EPA’s shift in import policy which could have caused the fall in soybean oil price via Reuters.
“U.S. regulators have given the go-ahead for Argentina’s biofuel makers to qualify for U.S. biofuel credits, potentially making it more attractive for South American exporters to sell into the U.S. market and potentially pressuring local prices.
The green light will effectively make it easier for the South American grains powerhouse to sell its big biofuel output into the United States, potentially jump-starting the local sector which has suffered from a drop in demand from its No. 1 customer, the European Union, due to a long-running trade spat.”
Argentina’s Biofuels Chamber, The EPA, The National Biodiesel Board, and the European Union!? Who knew Soybean Oil policies could be so exciting. Now the article doesn’t link this policy change to a fall in prices, and this policy change happened last week, so it’s unlikely that this is what caused such a drop. However, this policy change from the EPA will create more supply because Argentina happens to be the world’s largest exporter of Soybean Oil, and now it can export to the U.S., and it will be accepted the same as Soybean oil produced in the states. Will this increase in supply fuel an implosion from soybean oil? We don’t know that answer… but we do know it can’t go to zero.
So have fun eating that stir fry, French fries, or whatever you’re having off that griddle. You might just be enjoying some Vegetable Soybean Oil.