Soyoil futures appear to be finding their feet again.On September 7, December futures came close to setting a 2017 high, reaching 36.06 cents a pound, as US proposals for hefty import tariffs on imports of Argentine and Indonesian biodiesel spurred talk of a jump in domestic soyoil demand as these supplies were replaced.
(Biodiesel is made from vegetable oils such as soyoil.)
And the US Department of Agriculture indeed on September 12 hiked by 550m pounds, to 7.0bn pounds, its forecast for US use of soyoil in making biodiesel in 2017-18 (which started this month for the vegetable oil in the US).
Export demand suffers
However, prices instead of extending gains, had tanked 10% from their high as of Monday, when they set a three-month low.
The decline has been attributed to factors - besides classic "buy the rumour, sell the fact" thinking - including a weak performance by US exports prompted by price gains.
After a recent peak of 27,657 tonnes in late July-early August, US weekly export sales (new and old marketing years combined) fell to 860 tonnes in the last week of August, and have not fully recovered since.
For the week to September 21, the latest data available, they totalled 15,542 tonnes.
The slide was accelerated by a threat posed by Environmental Protection Agency's announcement to the US biodiesel boost.
The EPA – now headed by biofuels critic Scott Pruitt - said late last month it was to review the US mandate for the use of advanced biofuels (including biodiesel) in the light of the potential boost to prices from the import curbs, as well as the lapse last year of tax credits.
And the turn in sentiment came at a time when hedge funds had built up a stack of ammunition for sales.
Soyoil vs soymeal
As of September 12, a little after the market peak, the hedge fund net long in soyoil futures and options topped 100,000 contracts for the first time in nine months.
Much of this was hedged against a short bet in soymeal. (Playing the two soybean processing products against eachother is a common investor strategy.)
The net long in soyoil has since fallen by some 25,000 contracts, fuelled by the unwinding of these long soyoil-short soymeal spreads.
Indeed, the net short on soymeal has dropped by some 25,000 lots too.
Industry fights back
But has the retreat in soyoil now run its course, for now at least?
December futures rose by 0.6% in Chicago in early deals on Wednesday, looking to build on gains in the last session, which was the first winning session in nine.
Hope has come from a fightback by the industry against the EPA, with 11 biofuels and farming groups which said that the agency's proposals "would serve no purpose other than to paralyse growth in US biofuel markets, slow investment in blending infrastructure, strand investment in advanced biofuels, and export innovation overseas.
"EPA's actions would cause severe harm to our industry, undermining your efforts to drive economic growth and secure America's status as the global leader in biofuel production," the groups said in a letter to President Donald Trump.
Soyoil vs palm oil
Furthermore, rival vegetable oil palm oil has offered support too, rising by 1.1% to 2,713 ringgit a tonne, December basis, in late deals in Kuala Lumpur.
Indeed, palm oil has far outperformed soyoil since that September 7 high, dropping by some 3.5% in dollar terms, December basis, narrowing its (typical) discount to December soyoil from $130 a tonne to about $85.50 a tonne.
Palm oil has found support in demand ahead of Indian and Chinese holiday periods, and ideas that Malaysian output data for September, typically the peak production month, will come in well short of initial hopes.
What to look for
Three factors to look out for ahead.
The first is the imminent return (on Monday) of Chinese investors from the week-long mid-Autumn Festival.
Will this bring gains in palm oil prices on China's Dalian market too, suggesting post-holiday restocking, or a decline implying that supplies are sufficient for now?
The second is whether fund sentiment on soyoil has turned. In the last session, they were reckoned by the trade to have been net buyers in Chicago soyoil futures for the first time in 10 sessions.
Will this be sustained?
The third dynamic to watch is movements on oil markets.
The drop in soyoil prices came, signally, for much of its length against a rise in crude oil prices, despite the importance of energy markets for vegetable oil demand.
Brent crude did not peak until September 26 – when soyoil had already been in decline for two weeks.
But then if Erik Norland, senior economist at CME Group, is right, crude oil markets actually follow vegetable oil ones, rather than the other way round.
If so, the 7% drop in Brent crude prices from their high last week may only be the start.