The eagerly awaited US presidential is just around the corner and traders already can be seen placing their bets on the outcome in November. Soybean prices, along with corn and wheat hit multi year lows last week on the Chicago Board of Trade (CBOT). Soybean is trading below the pivotal USD10.00 per bushel, down 22% year-to-date, a level not seen since 2020. Soybean oil futures are also trading down 17% for the year at 38.69 US cents per lb. Palm oil (CPO), although down 1%, has outperformed its rival soybean oil by a country mile for reasons which we will discuss. Soybean oil and CPO prices tend to move in tandem as they are substitutes in the vegetable oil market.

REASONS FOR THE CURRENT MULTI-YEAR LOW GRAIN PRICES IN THE USA

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1) USDA BALANCE SHEET AND FAVOURABLE WEATHER

The US Department of Agriculture (USDA)’s August WASDE report showed an upward revision in the soybean crop forecast, further pressuring prices. Chinese imports in June 2024 were down 10% vs the same period in 2023.

For the 2024 growing season, weather has been very favourable in the Midwest region. Overall weather during the critical growing months which “make the crops”, have been extremely good with no adverse heat that typically pose as a threat between the June to July period.

2) TRUMP’S PROTECTIONISM POLICIES 

We can all recall what Trump’s protectionism policies did to the farmers in America. The former US president placed tariffs on billions of dollars’ worth of goods around the world, targeting China in particular. Soybean prices plummeted to USD8.00 per bushel, wreaking havoc in the agriculture futures markets. So it is unsurprising that this time round, markets seemed to price in another round of ‘Make America Great Again’ policies should Trump come into power again.

According to the USDA latest WASDE report, Brazilian exports to China increased by 9.68% by June 2024 vs the same period in 2023, taking away market share from the US. This was the similar trend during Trump’s last reign as President, where soybean exports from South America increased tremendously.

WHY CRUDE PALM OIL PRICES HAS OUTPERFORMED

Performance of soybean oil vs palm oil since June 2023

Hence, it is inevitable that CPO prices will also be directly affected by the drop in soybean oil prices given its’ role as a substitute vegetable oil. However, the outperformance of CPO has clearly been in place since November 2023. Comparing the valuations of CPO versus soybean oil, we see the USD differential between the 2 products shrinking tremendously from a soybean oil premium of USD200 premium over CPO in November 2023 to only a USD10 premium today. This can be attributed to the tighter balance sheet of palm oil compared to soybean oil. Furthermore, palm oil’s exports mainly go to India and China, escaping Trump’s protectionism policies.

Recent data released by Malaysian Pam Oil Board showed that stocks fell 1.73 million tonnes in July from 1.83 million tonnes in June, despite being in the high production cycle. Indonesia’s production also declined to 22.1 million tonnes in January to May 2024 vs 22.9 million tonnes in the same period in 2023.

Indonesia’s aggressive biodiesel policies are also seen to be bullish in the long term for CPO prices. According to the agriculture ministry, the nation aims to increase the mix of palm-based biofuels with diesel to 50%. The current blend is 35% (known as B35) and Indonesia plans to expand this to B40 the following year.

CONCLUSION

Going forward, it is highly unlikely that CPO prices will see the Covid all-time-highs of RM7,100 per tonne in the near future. However, should Trump wins, the recent outperformance of CPO vs soybean oil is expected to continue with the possibility of CPO trading at a premium to soybean oil, a phenomenon last seen in 1997. 

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Disclaimer: This blog is created for sharing of trading ideas only. It is not in any way or form meant to be an inducement or recommendation to buy or sell any stocks. Consult your financial consultant before making any financial investments.