Refined Oils Weekly Wire 05/25/2012 The following is provided for informational purposes only and is not a recommendation to buy or sell a commodity. Much of this information is derived from sources that are believed to be reliable, but we cannot give any assurance or guarantee as to its accuracy or completeness. Commodity trading is inherently risky and actual market results may vary significantly from the following. You are cautioned not to place undue reliance on this information.
Bears Bulls Members of the Eurogroup Working Group (creative name) leaked a memo on Wednesday that directed member states to plan independently for a Greek exit from the EU. The memo suggested a Grexit (also extremely creative) would be manageable for members, and that the ECB would likely supply Greece with 50 billion Euros to help smooth over the transition. Many believe the grexit would be beyond terrible for Greece, and a huge negative for the Euro. In response, the US$ surged this week to levels not seen since Nov 2010, and crude oil fell below $90. On top of all that fear liquidation, these extremely volatile markets have caused another dilemma for traders. Value at Risk is an important measure for trading limits, and is basically a measure of risk of loss on a specific portfolio given a time horizon and a standard deviation of mark-to-market probabilities. It has been noted by some that volatility over the last week has caused VaR to rise significantly so much so that if a trader was at 80% of his VaR limit last Friday and has made no trade limits since then, he could be well over 100% VaR today, forcing him to sell out of positions (this is because volatility increases the risk of any trade). And if this happens to a lot of people at once, mass selling could take place creating a bad feedback loop. Rumors of China cancelling cargoes of everything from beans to iron ore to coal have rattled markets, leading many to believe their economy is worst off than previously thought. Soybean exports last week of just over 800,000 tonnes, and while up 30% from the previous week, most analysts were expecting exports of between 1-1.25 million tonnes. Soybean oil exports also disappointed last week at 9,400 tonnes. Analysts were expecting between 15-20k tonnes. Chinese customs data released this week showed that soybean oil imports in the moth of April were 77,806 tonnes, a 52.48% increase over April 2011. Rapeseed oil imports were 69,111 tonnes, up 5.42%. Palm oil imports were 458,859 tonnes, up 1.29%. Chinese custom officials also announced that soybean imports were 4.884 million tonnes, up 26% from the year prior. Rapeseed imports were 287,244 tonnes, up 254%. Celeres estimated this week that the Brazilian soybean crop was 84% sold vs 65% a year earlier. This leads some to believe that farmers are running out of bullets to pressure the CBOT price. Celeres also estimated that farmers have sold 26% of the new crop. The Buenos Aires Grains Exchange cut its estimate for Argentina s soybean crop to 39.9 million metric tonnes from their previous forecast of 41 million tonnes. Their statement cited bad weather as the reason for the decrease. Soybean meal export sales of 144,600 tonnes were up 26% from the week prior, and 9% higher than the 4-week average. 144,600 tonnes were in the middle of the range of expectations, and helped to sell the story of global protein tightness. There has been talk this week about an El Nino threat for the last half of 2012 which could adversely effect palm oil production in Malaysia. Lately palm oil has been trading at a US$130/metric tonne discount to Soybean oil, so a bounce in that could support soy prices.
July Soy Oil (BON) MACD Trade Volume Index For people like me who are interested in this kind of thing, this week I am going to highlight some of the technical indicators a little bit more. First up, the MACD. What this does is try to gauge market momentum by comparing the difference between moving averages (buy when the difference of the 12 and 26 day moving averages crosses above the 9 day MA, and sell when it does the opposite). In the above chart buy signals are represented by green circles, and sells by red ones. If you were to follow this strategy in 2012, you would have a profit of 757 points (In fairness, 728 points of that profit has come in the last move). The last time a sell signal was tripped was on April 16 th. Between then and now, the signal widened to -.41, and has now narrowed back to -.26 (getting back to 0 would be a buy signal). The second indicator I want to look at this week is the Trade Volume Index. What this shows is how much volume is traded at (or near) the Bid or Ask Prices. The theory goes that if trades are getting done closer to the Ask price, it means traders are accumulating long positions (TVI Value is rising), and if trades are getting done at the Bid price, traders are likely accumulating short positions (TVI value is falling). I wrote the above on Tuesday, before Wednesday's liquidation. Total profit for following the MACD is now around 800 points since Jan 1. 3
July Oil Share July oil share continues to chop around, lacking direction. In previous weeks it had been declining as global meal tightness increased the likelihood of a healthy oil supply, but this week it felt like the decline might have been over done. Also, continued strong exports out of South America have lead some to question how tight world stocks really are. Looks like we will need more strong confirmation before oil share makes another large move lower. 4
Soy & Palm Price Relationship All in US Dollars per Metric Tonne 5
Soybean Complex Commitment of Traders: Non-Commercial Funds (Beans, Meal, and Oil Combined) Non-commercial funds cut their net long position in the soybean complex for the third consecutive week. The decline of 43,270 futures and options was the largest weekly decline since the week of Sept 27 th 2011. Non-comm funds have now shed over 98,000 contracts of length in the last three weeks. However, at the same time open interest across the complex has risen by 53,316 contracts, indicating new shorts may have entered the market. 6
Soybean Oil Commitment of Traders: Non-Commercial Funds Net Change Summary: Net position -18,900, open interest +16,750 Non-commercial funds decreased their net oil position for the fifth straight week, increasing their net short by 18,900 contracts. The net short position as now at its shortest Jan 31 st. The current net position is -22,424, and the low water mark for non-comm funds for the last two years is a net position of -30,680 futures and options in November of last year. Open interest in soybean oil futures and options has grown each of the last two weeks. 7
Top & Bottom Ten Cross-Commodity Correlations- One Week Positive correlation means prices move up or down together, and negative correlations mean if one price is up the other is down. A perfectly direct correlation has a value of 1, a perfectly uncorrelated data set would have a value of 0, and perfectly inverted correlation has a value of -1. Top Ten Positive Correlations Top Ten Negative Correlations This slide perhaps is the one that speaks loudest to me right now. Right now, soybean oil holds the top three cross commodity correlation spots, and they are all with energies (heating oil, crude oil, and gasoline). What this tells me is that bean oil a near complete follower in the world market right now, trading only on macroeconomic events, and not on fundamentals. While there are funds still betting on oil share, it seems the flat direction of soybean oil is more dependent on the world economy for the near future. 8
Heating Oil-Bean Oil (HOBO) Spread The higher the spread, the more incentive biodiesel producers have to use soybean oil to make methyl ester The heating oil-bean oil spread rallied about 12 cents per gallon this week between Monday and Thursday, meaning that soybean oil is more favorable to use in methyl ester production. However, this does not necessarily mean more soybean oil has been sold to biodiesel producers as the EPA s notices of violation for fraudulent 2011 RINs has kept a lid on the methyl ester market for the time being. So while margins on paper look better this week than they did last week, physical volume is still extremely light and likely wont pick up until the EPA clears the waters on fake RIN announcements. Also holding up production has been a delay in the EPA announcement for the 2013 mandate. Many believe it will be 1.280 billion gallons, but until it is certain obligated parties will sit on the sidelines. Most expect the announcement to come sometime in June. 9
Corn Planting Progress 10
Soybean Planting Progress with yields 11
US Forecast: 6-10 Day Outlook from NOAA Probability of above or below normal Precipitation Temperature 12
NOAA Precipitation Analysis Past 7 days percent of normal precipitation 13
Canola Notes Rapeseed futures in Winnipeg have increased about C$10/metric tonne in the last two weeks which has smashed board margin as product prices fell hard. Canola board margin for December is now down about C$40/tonne since the end of April, which has been extremely supportive for canola oil basis as the cas margin now must carry more of the burden. There were a few worries this week about cold temperatures in the Canadian Prairies Thursday night. Across parts of Alberta, Saskatchewan, and Manitoba temperatures fell below freezing for several hours, worrying farmers who had gotten their crops in the ground early. Most meteorologists don t think temps fell below 30, so there was no hard freeze, but canola futures responded up about 1% on the news. Canola planting is ahead of pace across Canada. Saskatchewan is reporting around 64% done, and Alberta over 50%. Manitoba planting is nearly finished. 14
Canadian Prairies one month departure from average precipitation 15
December Canola Board Margin & November Rapeseed (Orange) 16
USDA National Ag-Energy Round Up- May 18 th, 2011 17
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Enhancing lives by improving the agribusiness and food production chain 19