Harvest-Ready Opportunities- Soybean Meal Spread

US soybean harvest begins in September but is most intense in October. Because soybeans themselves have few uses other than for seed, processors crush them into two primary products: soybean oil and soybean meal. The United States Department of Agriculture (USDA) defines the crop marketing year for those soy products as beginning in October, ending in September

US soybean harvest begins in September but is most intense in October. Because soybeans themselves have few uses other than for seed, processors crush them into two primary products: soybean oil and soybean meal. The United States Department of Agriculture (USDA) defines the crop marketing year for those soy products as beginning in October, ending in September

Livestock producers logically want to feed as many animals as possible when feed is most plentiful and thus normally least expensive — in other words, during and after corn and soybean harvest. Thus, seasonal demand for soymeal is strong from harvest through winter. With US animal numbers peaking, fewer South American supplies available for export, and soymeal accounting for such a high proportion of product value, US processors have every incentive to operate at capacity as soon as harvest begins. Thus, soymeal demand is high in October; but production peaks, new supply surges, and delivery against futures soars.

Consumption continues high throughout the cold weather but in spring begins to decline into summer. However, consumption both foreign (exports) and domestic (processors) after harvest has by then already sharply reduced the supply of soybeans — the remainder of which must stretch until the next harvest several months hence. New South American supplies make their way into world export channels only slowly until perhaps June, so prices for soymeal tend to rally in spring and even into summer.

Thus, whereas heavy harvest supplies of soymeal can depress prices during September and into October, supplies for spring delivery attract demand. For example, Moore Research Center, Inc., has found that the Long May/Short October Soybean Meal spread has closed more favorably toward May on about September 19 than on about August 29 in 14 of the last 15 years — suffering no daily closing drawdown greater than $4.40/ton in doing so. (Each $1.00/ton is worth $100.)

The 15-year seasonal pattern for this spread suggests a typical bottom in June followed by a concerted rally during July and then again throughout September. This year, however, the spread enjoyed a persistent uptrend from its low in December, when the May contract traded at a discount to October of -$5.90/ton. By the second week of August, it had traded at a premium of +$9.30. Further, that uptrend was contained within an orderly channel.

The high at +$9.30, however, hit the upper channel line, from which the spread at least initially reacted. The seasonal pattern suggests a decline into late August (when notices of delivery against September futures are being prepared). Will this spread now return to its lower channel line? Or retrace 40-60% back toward its most prominent recent low of $2.10 in July?

Doing either might set the spread up for its typical run higher during September. After all, the monthly chart portrays historical resistance at and above a premium of +$10.00 — although it does have a 30-year high of +$17.20. The next USDA estimates of US Crop Production and World Agricultural Supply and Demand are scheduled for release September 12.

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Commentary and Charts Provided by Moore Research Center