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23-year high soyoil prices spark sell signals

As the CBOT July soybean oil prices jumped to 23-year highs on Friday, analysts are urging producers to take advantage of a bullish soybean market by pricing multiple years of inventory.

During Friday's session, the July CBOT soybean oil contract traded at $0.35 per pound, the highest price seen since June of 1984. Essentially, since it hit a February 2005 low of $0.18 per pound, the soybean oil market has never looked back, analysts said.

INDEX FUNDS ACTIVITY

The bullishness comes at a time when U.S. soyoil stocks are high, giving way to conventional market wisdom of supply/demand. Whenever this happened in the corn market, analysts said the index funds were to blame, making the market vulnerable to a change in direction at any given moment.

Anne Frick, Prudential Bache Commodities LLC oilseed analyst, said the index funds are small in this market with only 21% of the open trade interest.

"It's easy to blame the index funds for driving a market higher when the fundamentals are not there, but that isn't the case here," Frick said.

So, should the interests of index funds be blamed?

Bill Biedermann, Allendale Inc., said the index funds investments, or "New York money," is the partial culprit for the run-up in soybean oil prices, Biedermann said. Plus, the tight world stocks of vegetable oil.

"Keep in mind the "New York money" is being supplanted into the market by people that are looking at the bigger picture of tight world vegetable oil supplies, not the abundant soyoil supplies in the U.S.," Biedermann said. "No matter, for the U.S. producer, this creates opportunity, and that's the way we should look at it."

LONGTERM BULLISH FUNDAMENTALS

Meanwhile, analysts see more concrete fundamentals in play for the bullish soyoil market such as worldwide mandates of biodiesel use.

Biedermann said the trade's perspective is that biodiesel blending requirements will keep soyoil prices going higher. In reality, the economics indicate soybean prices are priced where they should be, Biedermann said.

"Even though there is no profitability in biodiesel right now, more countries are mandating the use of it," Biedermann said. As long as the market's perception is that soyoil usage increases from the mandates then the soybean market gets support."

Meanwhile, if more soyoil is being used that means less soymeal. "In this case, soybean oil has to stay a lot higher to make up for the lost revenue from the meal. And when you put the two together soybeans are economically priced where they should be," Biedermann said.

Frick said the mandated blending requirements make the biodiesel production profitability a secondary factor.

"In the U.S. anyway, many of the biodiesel producers are vertically integrated, meaning they can get their feedstock at the least possible cost. They have built these biodiesel plants next to their crushing plants," Frick said.

In addition, estimates for more corn and less soybean acres could further tighten the soybean and soyoil supplies in 2008, Frick said.

"I think we have seen that already in the markets this week," Frick said. Recently, the USDA tightened corn and soybean stocks. USDA estimated the 2008 usage of soybean oil for methyl production at 3.8 billion pounds, compared to 2.55 billion. That's optimistic, but you don't hear anybody saying usage will go down."

Also, the surge of palm oil prices due to tight stocks in Malaysia is yet another bullish fundamental for soybean oil, causing a shift of exports from palm oil to soybean oil.

"Plus, the fact that the two most populous countries in the world, China and India, are decreasing oilseed production, causing them to need record large quantities of vegetable oil," Frick said.

MARKETING OPPORTUNITY

For the next 60 days, producers should view this market activity as a tremendous opportunity to get one to three years of inventory sold, Biedermann said.

"It doesn't matter if you are talking about corn or soybeans," Biedermann said. "The money is chasing this market like we've never seen before. And if we throw some bad weather at these guys (index fund investors), they are going to run this thing like crazy."

This is the first time ever that Allendale has ever sold any crop more than one year out. "We are definitely going to do that this year," Biedermann said.

Frick agreed that producers should consider selling some of their soybean crop.

"We're looking at prices that are approaching the spring highs we had at above $8.00 per bushel, and that is not bad price for farmers," Frick said. I personally think the prices will go higher, this is not the high."

As the CBOT July soybean oil prices jumped to 23-year highs on Friday, analysts are urging producers to take advantage of a bullish soybean market by pricing multiple years of inventory.

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