Grains Oilseeds

[Arctec]

SOYBEAN OIL STRATEGIES

If Al Gore can be nominated for a Nobel Peace prize and accept an Oscar, the global warming war may be just beginning, as the politics of a major change in energy usage is well entrenched and burning biofuels appears to be at the forefront of the list of solutions to these problems. Sugar prices soared in 2005 and corn reached a 10-year high in 2006, so it may be safe to say that if the war against global warming and the desire to lower imports of oil from the Middle East stays as a high priority on the political front, a surge in vegetable oil prices may be close at hand. According to the Environmental Protection Agency, burning biodiesel instead of petroleum diesel decreases hydrocarbon emissions by nearly 70% and carbon monoxide and particle emissions by nearly 50%. In the past, the economics of energy use has been the primary driving force of the decision making process, but the war on global warming will become a more significant factor as governments around the world attempt to increase the use of biofuels in their everyday usage.

Europe has been the leader in biodiesel usage, but Brazil, China, India and the US could catch up quickly in the next few years. As soybean oil becomes more and more an energy commodity, price advances could come quickly. While the usage pace for biodiesel in the US has been slower than expected, the longer term demand lift from production around the world could be significant. The enclosed chart shows the US usage of soybean oil for biodiesel production. In 2006, biodiesel production consumed 1.569 billion pounds of soybean oil, and this is expected to grow to near 3.3 billion for the coming year and near 5 billion pounds the following year. If the US were to shift to a goal of a 5% mix of biodiesel and soybean oil were used as a feedstock, it would take 23.4 billion pounds per year of soybean oil as compared with total production near 20 billion pounds per year. We should note that there are just 70 plants in the US, with around 50 larger-scale production facilities under construction. In 2005 there were just 300 retail outlets which provided biodiesel, but this number grew to 950 locations in 2006.

As an example of how quickly the jump in biodiesel usage could impact soybean oil and soybean supply, consider just one company in Brazil. The leader of Brazil's biodiesel industry (Brazil Ecodiesel) plans to produce 1 billion liters by 2010 and export 20%-30% of the total. By the end of 2007, production capacity will be near 800 million liters, and the firm is negotiating to supply biodiesel to European and North American firms. It takes about 1.98 billion pounds of soybean oil to produce 1 billion liters of biodiesel, and it takes about 176 million bushels of soybeans to produce 1.98 billion pounds of oil. At the USDA Outlook Conference last week, the USDA pegged ending stocks for 2007/08 at 2.035 billion. As you can see, the impact of a minor shift in energy usage of biodiesel could have a major impact on production and supply of the feedstock.

Suggested Trading Strategy: Buy December soybean oil at 30.32 with an objective of 35.82. Risk the trade to 29.38. 2) Buy the December soybean oil 32.00 call and sell the December oil 29.00 put for a net premium paid of +90 points. If the market trades up to 33.75 for December oil in the next 100 days, the spread should reach an upside objective of +270 points. Risk 105 points from entry. (Projected option values are based on pricing models and are not guaranteed.)