Perfect storm drives up oil values

With lost production hitting the three main vegetable oils – palm, soya and rapeseed – prices are rocketing, with once plentiful sunflower oil supplies now in question because of the RussiaUkraine war John Buckley

The bad news for vegetable oil consumers has piled on week after week since our New Year review. Not only are prices rocketing amid a perfect storm of lost production among three of the four most used oils – palm, rapeseed and soyabean; now a geopolitical supply disruption has emerged for the once relatively plentiful fourth member, sunflower oil.

Will record prices across the sector slow food oil consumption just as industrial biodiesel use gains new lustre from soaring energy markets? And what impact will all this have on producers’ planting plans?

How will US farmers exploit Latin America’s La Niña crop losses? A few months ago, most analysts appeared to play down prospects for a major hit to Latin American soyabean crops from a La Niña spell. Brazil was expected to produce a record 144M tonnes, Argentina as much as 51M tonnes and Paraguay 10.5M tonnes, all sowing more in response to the past season’s nine-year highs in prices.

Dryness and heat waves have now slashed analysts forecasts, some running as low as 121M, 38M and 4M tonnes respectively for the three main producers. Some untimely rain in harvest-ready Brazilian regions has been a mixed blessing, raising risks of a yield or quality hit, offsetting the more bearish impact of a crop maturing and arriving on the market earlier than usual. Even if some of these countries manage to produce a little more than the lowest estimates, it is clear export supplies of both raw soyabeans and their oil will be far below what was expected at the turn of the year.

The response on the markets has been dramatic, Chicago Board of Trade (CBOT) nearby futures have rocketed from little more than US$12/ bushel at the end of 2021 to over US$17/bushel recently. How will American farmers respond?

The US Department of Agriculture’s recent Outlook Forum put a figure of 35.6Mha on the 2022 planted area. Assuming a normal planted/harvested ratio and yields not far off last year’s average result, the crop might be around 122-

Figure 1: Crude vegetable oil prices apart from refined palm oil (US$/tonne)

124M tonnes compared with last year’s 120.7M tonnes.

Even if the Latin American crops had fared better, they would not have added much to the relatively low US carryover stocks foreseen for the close of the season. However it would not be so surprising to see farmers planting if prices stay high. Looking to the futures markets, soyabeans are expected to stay firm at least until the next US crop arrives.

Moving targets on the demand side are US crush, which has been strong recently, partly to feed meal exports and partly due to rising domestic soya biodiesel demand. The latter sector is expected to expand its needs by almost one quarter this season to a record approaching 5M tonnes – about 43% of US total domestic ‘disappearance’.

Another spur driving soyabean oil price strength has been a burst of demand from large edible oil importers such as India, as it faces tightening supplies and soaring costs of usual staples like palm, sunflower and rapeseed oils.

After peaking in the US$1,730s, US soyabean oil futures were trading near US$1,650/tonne as we went to press against US$1,170 in late December.

CBOT soyabean futures have also enjoyed a revival in demand from top buyer China. Although the USDA has been working on the basis that Chinese imports may ease back by almost 5.8M tonnes to some 94M tonnes, the country has been a constant buyer recently, driven by fears that larger Latin American crop losses will interrupt its supply.

Brakes off palm oil

Ideas that record palm oil prices would destroy demand looked a little premature as the combination of crop losses and extra demand in competing oil sources – not to mention the strongest energy market in a decade – played into the bullish narrative for palm oil in first quarter 2022.

Official Malaysian Palm Oil Board data showed second largest palm oil supplier Malaysia recording a bigger fall in February’s exports than the markets expected – some 18.7% on the month – and closing stocks eroded by 3.85% to about 1.55M tonnes, their lowest level since July 2021. Imports fell on the month to all major consumers and many smaller customers as well. But while the early February export data was unpromising, things seem to have picked up since – with a 15% bounce in early March. Output usually starts to pick up seasonally in March, rising by 28.5% last year.

Price support came from reports that cuts in import taxes in India – the world’s largest vegetable oil buyer – might stimulate more demand as it struggles with rising food price inflation.

The risk of disruption to Ukrainian sunflower oil shipments (and tight rapeseed oil supplies after last year’s poor Canadian crop) also appear to have blunted the impact of palm oil price rises.

The biggest upset for palm oil in the last quarter was top supplier Indonesia moving to curb its exports to protect its domestic food oil consumers from soaring prices – for which the country’s ambitious biodiesel

INTERNATIONAL MARKET REVIEW

Perfect storm drives up oil values

Figure 2: Malaysian palm oil prices since 2015 (nearby Bursa futures, US$ equivalent)

Graph: John Buckley

plans must take a lot of the blame.

As little as five years ago, Indonesia consumed just over 9M tonnes/year in its own market. This season, it is expected to use 16M tonnes, becoming the biggest consumer and fastest growing outlet for palm oil. Next in line, India, China and the EU account for about 8M, 7M and 6.5M tonnes of palm oil demand respectively.

In both Indonesia and Malaysia, production will depend not only on weather but post-COVID labour mobility and steeply rising fertiliser costs.

Indonesian exporters now have to obtain permits, while producers must declare how much they plan to sell on the home market (a target 30% of export volume). Indonesia is also going ahead with plans to test higher blends of palm in biofuel in response to reduced demand from key importers like the EU, with its decarbonisation and environmental agendas.

Malaysia last year exported 10.6% less palm oil. Among major importers, demand from India bounced back from unusually low 2020 levels by some 30%. China cut intake by 31%, Europe by 15% and Pakistan by 15%. Malaysian full year production fell 5.3%, keeping stocks on a downward trend.

Rapeseed recovery?

Recent reports suggest a relatively modest response to the supply shortages that have driven rapeseed/canola and its products to record high prices in the past few months. As the largest supplier, Canada – with its mainly spring-sown crop – is best placed to plant more in 2022 but is limited by the disease risks of repeat sowing on the same ground, as well as rocketing prices of wheat – its main competitor for hectares. Recovery will therefore depend more on yields returning to normal from last year’s drought-depleted level.

On the plus side, Canada seems to be leaving the worst of its long drought behind, which should help the sowing of its crop. Against that, stocks will start at their tightest level since 1998 – just 500,000 tonnes against 3.44M tonnes in 2019/20. Recent estimates suggest the country’s crop this year could reach 21M tonnes against last year’s 12.6M tonnes.

However, demand will rebound as well. A recent Canadian conference saw potential 2022/23 off-take of 19.8M tonnes against this season’s 14M tonnes. However, importers will welcome a possible return of Canadian exports to a more normal 10M tonnes. Agriculture and Agri-Food Canada (AAFC) recently forecast 2021/22 exports finishing at 5.4M, having dropped 44% for the season to date, hitting Chinese and EU importers hard.

Competition is expected to intensify between overseas and Canadian crushers, the latter expected to bid hard to maximise plant efficiency or closing the season early. Ironically, processors have been investing in a Canadian crush boom, recent new ventures pointing to capacity expansion of around 6.8M tonnes, so Canada must plan for larger future crops.

Europe meanwhile, expects a bigger rapeseed crop in 2022, with French analyst Strategie Grains estimating a potential 7.4% jump to around 18.2M tonnes. However, the new season will start with low stocks. Globally, the carry-in will hit a multi-year low of less than 4M tonnes, almost half the level of two years ago. Last year’s Canadian crop loss was only partly offset by bigger harvests in Australia, Russia, Ukraine and Europe. As this issue goes to press, how the current conflict between Ukraine and Russia will play out in terms of agricultural production and trade is the big question and that uncertainty is likely to add to the bullish undercurrent in the rapeseed/canola market.

Sunflower oil supply threat

The Black Sea region is crucial in terms of global sunflower oil supplies, and was to account for 77% of this season’s global exports before the current Russia-Ukraine conflict broke out. Ukraine was expected to export some 6.65M tonnes and Russia 3.8M tonnes out of a total 13.5M tonnes.

India had been expected to top the import league, taking 2.7M tonnes as it switched some of its edible oil demand from increasingly expensive palm oil. Second place was expected to go to China at 2.18M tonnes, then the EU at 2.05M tonnes. Sunflower oil is also a popular choice in the Middle East/North Africa (MENA) region.

At this stage, Ukraine’s export position is unknown. Sea port activity has been halted and the conflict raises questions over other land routes to Western Europe.

Russia has maintained a semblance of ‘business as usual’ for grains and oilseed exports but how reliable can that be under the present volatile circumstances, not least the effect of sanctions on trade finance?

Overall, sunflower oil accounts for about 10% of world vegetable oil consumption, having roughly doubled its contribution in the past dozen or so years. Until the vegetable oil price boom began in 2019/20, this growth had enabled sunflower oil to emerge as one of the more competitively priced oils, helping to keep costs generally in check. Prior to the conflict, crude sunflower oil was one of the few major oil sources not to have broken record 2007/08 prices. On present pointers, that barrier could soon be broken.

Among the other vegetable oils, output of cottonseed, coconut, olive, palm kernel and groundnut oils are all expected to make modest extra contributions to global supplies but their impact will be eclipsed if soyabean or palm oils continue to underperform. ● John Buckley is OFI’s market correspondent