Oil Crops Outlook: Larger South American Crops Subdue U.S. Prices

Even with no forecast changes this month for U.S. soybean supply and demand, there is sustained pressure on domestic prices. Ever larger crops and exchange rate weakness in South America led USDA to shave the forecast of the U.S. 2019/20-average price this month by 5 cents per bushel to $8.70. Better expected yields led to higher 2019/20 soybean crop forecasts for Argentina and Brazil this month—both by 1 million metric tons to 54 million and 126 million tons, respectively.

Domestic Outlook

Bigger Foreign Supplies Suppress U.S. Soybean Prices

Even with no forecast changes this month for U.S. soybean supply and demand, there is sustained pressure on domestic prices. Ever larger crops and exchange rate weakness in South America are tempering the impact of this year’s U.S. soybean stocks reduction.

This month, USDA shaves the forecast of the U.S. 2019/20-average price by 5 cents per bushel to $8.70. For soybean meal, a comparatively steady price level leaves USDA’s forecast of the 2019/20 average unchanged at $305 per short ton.

Support has also eroded for domestic soybean oil prices with inventory accumulation and a slide in global palm oil prices. The sudden collapse of crude oil prices—with the benchmark West Texas intermediate price down 23 percent since January—also undermines what the biodiesel market may bid for soybean oil.

So, the February monthly average price for soybean oil in central Illinois fell to 30.3 cents per pound from the January average of 33 cents. USDA reduces its forecast of the 2019/20 average soybean oil price by 2 cents per pound this month to 31.5 cents to reflect this trend.

Lower Domestic Use of Soybean Oil Pushes Stocks Higher

The January 2020 soybean crush is the highest monthly rate ever but it represents only a small increase from December. And only now has the cumulative crush for September-January 2020 (at 897.7 million bushels) caught up with the year ago pace.

January ending stocks of soybean oil surged to 2.352 billion pounds from the December inventory of 2.134 billion. The marginal expansion for January soybean oil output means that the recent stocks accumulation is mostly related to lagging demand.

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Total use of soybean oil for the 2019/20 marketing year to date is down by 7 percent (621 million pounds) from a year earlier. Lower consumption of soybean oil for the production of biodiesel is primarily responsible. Compared to a year earlier, cumulative production of biodiesel for October-December 2019 slumped by 19 percent.

This period was prior to the January 1 restoration of the biodiesel blending tax credit. At the same time, soybean oil has also lost about 5 percent of its share in the total use of biodiesel feedstock as the use of other feedstocks held steady. The depth of the year-on-year deficit in soybean oil use for biodiesel prompted USDA to scale back its 2019/20 forecast this month by 200 million pounds to 8 billion.

Consequently, this change pares the forecast of total domestic use by the same amount to 22.9 billion pounds. Soybean oil demand is likely to strengthen for the remainder of 2019/20, though, which should gradually tighten the season-ending stock carryout to a little more than 1.5 billion pounds.

The upside of lower domestic demand and falling prices of soybean oil is that now U.S. exports are more competitive. Foreign demand for U.S. soybean oil will benefit from a curtailment of Argentine exports as well as a lower than usual price premium relative to palm oil.

The outlook for U.S. soybean oil exports is already brighter with expanded sales commitments to price-sensitive import markets in North Africa and Latin America. Soybean oil exports for 2019/20 are forecast 200 million pounds higher this month to 2.1 billion.

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