Nogger's Rapemeal Strategy

There's a huge spread opened up between nearby and summer & beyond rapemeal at the moment. With everybody talking the soya market down on the back of huge South American crops on the way, and the notion that the UK will soon be awash with DDGS that Ensus (followed by Vivergo) can't give away, prices are surely going lower than Kerry Katona's IQ, right?

Certainly the feed compounders in the north are milking "Ensus fear" for all it’s worth and both Cargill & ADM seem to believe that there is some truth in it, and are pricing summer onwards accordingly.

I’d be inclined to think that Ensus’s DDGS aren’t going to have as large an effect on rapemeal demand as many seem to think. Particularly in the summer positions. Firstly, the plant appears to have been "going to start up on Monday" every week since last May. Secondly, despite buying in some DDGS that they already had contracted to supply Oct09/Apr10, they will likely still have a fairly sizable carryover of sales from the winter. These they will be still be obliged to supply (presumably with a discount) when the plant finally does get into operation. So effectively, some of the Ensus summer DDGS production is probably already “sold”. Thirdly, there will surely be production hiccups even when the thing does start to roll.

The pressure of a UK oversupply of DDGS this summer might not be as great as many appear to think, so it may be an idea to take advantage of summer rapemeal whilst that is still the case.

In addition the Vivergo plant in Hull is officially also supposed to begin production this summer, although if it produces anything of any significance in 2010 I for one will be surprised. These things rarely run according to schedule, as Ensus would testify, but the threat of more DDGS on the market from this quarter is currently out there.

CBOT soya frequently puts in a first-half yearly low in Feb sometime (often early Feb), maybe it has already done that again? March beans hit USD9.00/bushel on Feb 4th, coincidentally the day before the Locust Dinner, is this starting to sound familiar yet? Last night they closed USD65 1/2 cents higher than that.

Despite the fact that you would think that a low would surely come in say April when the South American harvest is in full swing, historically it seems to be the impending threat of South America, rather than the reality of it that puts a bottom in place this month. Maybe that is because by April the logistics of getting large crops to the ports in South America has already started to create front-end premiums? Certainly those logistical problems are going to be even more in evidence this year. Maybe they should plant roads and rail terminals instead of soybeans and corn next season?

I’ve written about this on the blog several times before including here: Where do we go from here? and also here: Have soybeans peaked?.

Even though the latter post was written in June 2009, the historical charts then pointed towards a seasonal decline from mid-June through to October, which subsequently proved to be the case although prices didn’t fall quite as low as during the “February break”.

As it happens therefore, both history and the current market fundamentals would suggest that a prudent strategy currently would be to definitely cover-in a decent proportion of May/Jul rapemeal requirements now, if you haven’t done so already. There are currently massive price differentials between spot and May, which to me would appear to suggest front-end premiums when we get there.

Some degree of cover now for heavily discounted Aug/Oct could also also worth consideration. A second bite of the cherry for Aug/Oct nearer the time, when a clearer idea of the real impact of Ensus DDGS on the market is more apparent, seems sensible. There may well of course be some harvest pressure by then too, with some decent front-end savings to be had.

A strategy to come back in again around October time to look at the winter, when US soybeans traditionally post harvest lows and when we will also have a better handle on Vivergo's timeframe, would seem like a sensible option. It certainly sees like rapemeal prices have been heavily under pressure around October in recent years, before shooting higher in the Dec/Apr period.