The Divergence Between Soybean Meal and Soybean Oil

Processing spreads are often great indicators of the future price direction of a commodity. When one traded commodity is the product of the refining or processing of another raw commodity, the spread between the two often tell us a great deal about supply and demand.

As an example, a divergence between the price of gasoline and heating oil in late 2015 and early 2016 while the price of raw crude oil was falling indicated that inventories for heating oil were plentiful.

At the same time, demand for gasoline rose at a seasonally slow time of the year for the oil product, a time of the year when inventories are generally low. There were reasons for the divergence between the prices of the two oil products. A warm start to the winter decreased demand for heating oil and the lowest price for gasoline in years increased demand from drivers. At the end of 2015, the price of NYMEX crude oil was down over 30% with heating oil down over 38% and gasoline down only 14% for the year. That is an example of divergence with the processing spreads for a commodity.

We saw another divergence in 2015, in a commodity that has a somewhat lower profile than oil. The processing spread for soybeans moved significantly lower while two soybean products diverged in price. Raw soybeans fell just under 15% in 2015 on a year-on-year basis. Meanwhile, the price of soybean meal fell by over 27%.

Meal is often a key ingredient in animal feed and it has other applications as well. Soybean oil diverged from the price of both meal and raw soybeans falling only 4.4% in 2015. Soybean oil is important for cooking and many foodstuffs like salad dressings and mayonnaises contain the oil of the raw soybean.

Like heating oil and gasoline, which are products of crude oil, soybeans meal and soybean oil are products of raw soybeans. When it comes to refining oil, processing of the raw crude occurs in a refinery in a catalytic cracker. Thus, the term crack spread for the processing of oil into products. In the world of soybeans, processing of the raw agricultural commodity occurs in a crushing plant where meal and oil are the products of a crushing process of the raw beans.

At the start of 2015, the crush spread for turning soybeans into meal and oil was at around $9 per bushel, at the end of the year the crush spread was at the $6 per bushel level. This tells us a lot about the demand for soybeans and soybean products that trade on the CBOT division of the CME. First, it tells us that a bumper crop in 2015 increased inventories of both soybeans and soybean products thus, causing prices to fall. Second, it tells us that the economics of processing soybeans into soybean products deteriorated over the year. The decline in the crush spread meant that those companies involved in processing soybeans made less money than at the beginning of 2015. Two examples are Archer Daniels Midland (ADM) and Bunge Limited (BG).

The divergence between soybean meal and soybean oil prices yields an important clue about demand. Clearly, soybean oil demand was healthier than that of meal throughout the course of the year. China, a huge consumer of soybean oil given the nation's massive population supported the price of soybean oil as they consumed and built inventories of the soybean product for the future. Even though the price of the overall crush spread fell, processing raw soybeans into soybean oil was profitable on its own while meal processing was not. The cost of the raw input was lower than the market price of the processed result. Since the price of oil was down only 4.4% and the price of raw beans were down over 14% in 2015, soybean oil saved the margins of bean crushing from falling even further on the year.

Moreover, on a long-term basis, the price of soybean meal and oil returned to a level that is close to the historical norm with last year's move meaning that the year-on-year divergence was a correction of a much longer-term divergence between the two soybean products. Since 2013, the price of soybean meal has outperformed soybean oil. A historical perspective is always important when it comes to the price relationships between commodities.

Following processing spreads and its components like in the case of soybean crush spreads yields important, real-time fundamental data about the current state of the commodity. This information is not available by looking at nominal prices of soybeans and soybean products on their own.