Humble soyabean becomes a ‘widow-maker’ for traders

The humble soyabean is a leading contender for widow-maker commodity of the year in 2016.

The “widow maker” trade of the 2000s was natural gas, taking down big name investors and trading executives whose bets were on the wrong side of the market. This year, the oilseed’s volatile swings in price — the meal is used to feed pigs and poultry and its oil for cooking and biodiesel — has wrongfooted many traders and investors.

What should have been a relatively bearish yet stable market due to forecast bumper crops, instead had a roller-coaster ride, on bad weather in key producing countries and unexpectedly strong demand.

“It’s been a hard market,” says Kona Haque, head of research at agricultural commodity traders ED & F Man.

Wilmar, the Singapore based trading house, was among the first to reveal that it had become a casualty of the volatility, issuing a profit warning in July. In August, it announced that its oilseed and grains unit had losses of $344m in the second quarter, blaming the poor results on the “untimely purchases of soybeans in a highly volatile market”.

The agricultural ABCDs — Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus Company — all announced that their soyabean trading or processing businesses had been affected by the volatility. Engelhart, the trader formerly owned by Brazilian bank BTG Pactual, also attributed part of its $225m loss in the third quarter to soyabean trades gone awry.

A few years ago, traders and investors might have only needed to focus on events in the US, the largest producer of soyabeans, and China, the largest buyer of the commodity. But the market movements this year highlight the rising risks for traders and investors as production of some commodities becomes more diversified and from the increasing impact of climate change on those various geographies.

On the demand side, soyabeans have also been affected by movements in other vegetable oil markets as well as consumption of meat in countries such as China. Price moves have also been exaggerated by speculative investors, such as hedge funds.

The year started on a bearish note, with the commodity trading below $9 a bushel for the first two months of the year as traders waited for the South American harvest. Soyabeans then started to rally in March, pushed higher by soya oil, which in turn was supported by the impact of the El Niño weather phenomenon, which hit palm oil production.

A further jolt upwards then came after heavy rains and flooding in Argentina, the world’s largest exporter of soya meal, hit the country’s crops.

From the beginning of March, soyabeans soared more than 40 per cent to a two-year high of $12.085 a bushel. Forecasts of an impending La Nina weather phenomenon, which tends to bring dryness to the Midwest also attracted speculative buying into the market.

Juan Luciano, the chief executive of ADM who also sits on the board of Wilmar, told analysts earlier this year that the “abrupt movements in prices” led to “stop losses” or liquidation of the Singaporean trader’s soyabean positions.

But at the end of June, soya bulls were hit by US planting numbers as farmers planted more soyabeans than they had previously signalled. The plantings report from the US Department of Agriculture showed that a record 83.7m acres of soyabeans would be planted in 2016, while a separate inventories report showed stocks were at their third highest level on record.

“The market realised it was a massive US crop,” says Stefan Vogel, head of agri commodity markets at Rabobank.

By late September, the market lost just under a quarter of its value of its mid-year peak. However, despite the bumper US harvest, the market was supported by unexpectedly strong buying by the Chinese as well as continued low production of palm oil in Southeast Asia.

“[The soyabean price] shouldn’t have stayed so strong once the US crop came along, but it’s really been a vegetable oil story and China buying,” says Ms Haque.

The market received another surprise last week when the US government announced that it would lift 2017 biofuel blending requirements by more than it had proposed earlier in the year. With soya oil being a feedstock of biofuels, the vegetable oil shot up more than 6 per cent with soyabeans closely on its heels.

The decision on renewable fuels from the Environmental Protection Agency had been expected to come at the end of the year, and the market was extremely thin ahead of the US Thanksgiving holiday, say brokers.

With the weather in South America looking benign, and the price difference between corn and soyabeans indicating that US farmers will increase the planting acreage of the latter over the former next year, the outlook for the market should be looking moderately bearish.

Matt Ammerman at brokers INTL FC Stone says that “the crowd is becoming bullish” over soyabeans. He warns of the unexpected moves that the market can spring, and points to what happened earlier this year, adding: “There’s still that [South American] weather risk.”

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