Palm oil leads reversal in

INTERNATIONAL MARKET REVIEW

Palm oil leads reversal in prices

Larger palm, soyabean and rapeseed crops, along with more cottonseed, groundnut and palm kernel oil supplies, should moderate oil prices over the coming months. A slower pace of growth in global food oil consumption may also contribute to more restrained pricing John Buckley

Figure 1: Malaysian palm oil prices (Bursa US$ equivalent) since 2015

The year 2022 to date has demonstrated that there is never room for complacency over supplies of raw materials for food. Global palm oil supply growth had been slowing in recent years but nobody expected top producer Indonesia to impose, without warning, a more or less total export ban to protect its own consumers from rocketing domestic costs.

Coming so soon after top sunflower oil supplier Ukraine’s forced export halt (who expected a Russian invasion before February?) and last year’s collapse in top rapeseed supplier Canada’s crop, it would have been surprising if this had not caused something akin to panic on the markets, not to mention the impact on consumers.

The irony is that the Indonesian ban did not achieve its objective in bringing domestic palm prices down to target levels as we went to press. There was clearly a lot of market ‘sentiment’ in the domestic/ global palm oil price boom, borne of fears it would gain unsustainable demand from customers like top importer India, unable to buy Ukrainian sunflower oil.

The ban did, however, stir predictions of a surge in Malaysian palm oil exports, resulting in some record prices trading on the Bursa Malaysia futures market – equivalent to over US$1,600/tonne at one point, against the US$600-800 range of several years past (see Figure 1, right). The swift end to the Indonesian ban was inevitable given: • The importance of palm oil to Indonesia’s foreign exchange earnings. • The lack of tank storage for a 7M tonne stockpile at the start of June. • Market talk of inflation/recession curbing global demand for oils. Figure 2: CBOT soyabean futures prices (US$ cents/bushel)

• The ban’s ineffectiveness in controlling prices. • A storm of protests from millions of

Indonesia’s smallholder farmers. • The industries involved in palm oil’s journey to market.

Things could get overdone on the downside. Top importer India is already forecast to take far larger quantities as the palm oil price dips further below that of chief rival soyabean oil. Other customers may respond similarly. In addition, Malaysia is still struggling with labour shortages and may not match expected production outlooks, even during the approaching seasonal peak period of fruit collection.

Although recently seeming to go all-out to reclaim its export role with expanding quotas and reduced export duties, Indonesia has still been moving to raise its palm biodiesel mix from 30% to 35%.

Both Indonesia and Malaysia recently indicated their supplies would probably not rebound as much as markets hoped in second-half 2022.

Indonesia’s government has forecast calendar year 2022 production rising to 48.24M tonnes from 2021’s 46.85M tonnes, while its own consumption has jumped almost 7M tonnes in the last five years. Malaysian first-half 2022 output is meanwhile only fractionally ahead of last year’s at 8.36M tonnes. Still tight rapeseed and sunflower oil supplies could also slow the palm oil price descent.

But against that, Malaysian exports are falling and key importer China could impose new COVID restrictions that curb demand in its restaurant sector, which account for half the country’s vegetable oil consumption. China’s vegetable oil imports have already plunged by almost 63% in first quarter 2022 to under 1.05M

Palm oil leads reversal in prices

tonnes. China is the world’s second largest importer of vegetable oils (after India), accounting for near 16% or 13M tonnes of the world’s total imports.

By mid-July, the markets had taken a mostly bearish view of this mix of factors, with Bursa Malaysia futures prices back to the equivalent of mid-US$850s/tonne. Given that palm oil accounts for some 36% of global vegetable oil consumption, other oils had to take notice of this about-turn.

Weaker soyabean oil prices

Some oils have already started to lose value, either on their own improving fundamentals or recognition that the recent price boom had reached its peak.

The second largest consumed oil, soyabean, should benefit from much larger crops sown or planned in the main producing countries of Argentina, Brazil and the USA. As long as Latin America evades the hot, dry weather of another La Niña, which last year cut its crop by 11% or 22M tonnes, the regional total could rebound by a hefty 21% (36.4M tonnes) to a new record high of 210M tonnes.

The USA is, meanwhile, estimated to have increased planting by about 4.4%, with currently favourable weather promising to boost the crop to a record 126M+ tonnes. That could boost world soyabean oil output by at least 2M tonnes – more if crush margins encourage more crop into consumption and less into global carryover stocks, which the US Department of Agriculure (USDA) currently sees expanding from this year’s low of 86M tonnes tonnes to as much as 100M tonnes.

The market reaction so far has been cautious. The crops still need to be grown and in Latin America region, won’t be sown until October onwards.

Nonetheless, Chicago Board of Trade (CBOT) soyabeans have recently traded down to four-month lows (see Figure 2, left). This was despite market talk that a heatwave threatening the Chinese crop could expand its demand for US and South American soyabeans.

China is already forecast to import 98M tonnes in 2022/23 against 90M tonnes this season as it recovers from depressed meal demand during a swine fever epidemic and the ending of renewed COVID lockdowns.

Meanwhile, the futures price of soyabean oil – which in late April briefly exceeded US$0.87c/lb – has recently eased back below US$0.58c. This partly reflected the steep fall in rival palm oil’s prices, and also concerns that slowing demand for energy due to recession might restrain expansion in biodiesel use.

The USA is expecting to use 5.4M tonnes for biodiesel next season against 4.85M tonnes in 2021/22 and 4M tonnes in 2020/21.

Including food use, the USA consumes about 11.5M tonnes of soyabean oil in total. Rising demand has helped support crush margins, enabling some record monthly figures in recent months.

Global soyabean meal consumption is expected to grow by around 4% to some 251.7M tonnes after stagnating in 2022/22 amid zero growth in soya supplies and their much higher cost in the wake of the Latin American crop shortfalls.

A bit less oil used in biodiesel and a slower pace of growth in world food oil consumption may also contribute to more restrained pricing, especially if China’s COVID lockdowns curb its restaurant use for soyabean oil. China takes around 60% of world soyabean exports.

The USDA recognised some of these restraints in its July World Agricultural Supply and Demand Estimates (WASDE) report, slashing its seasonal 2022/23 forecast for Chinese soyabean oil imports u

Figure 3: Crude vegetable oil prices (US$/tonne) Figure 4: USDA estimates of world vegetable oil output

from 950,000 tonnes to 350,000 tonnes. Hardly was the ink dry on that than Chinese customs reported the country’s total edible oil imports during June collapsing to just 245,000 tonnes – 20% below May and a staggering 75% under the June 2021 total.

Rapeseed price down

Rapeseed/canola oil supply is expected to benefit from Canada’s crop rebound as better weather lifts its yields from last year’s drought-depleted levels.

With larger crops in Europe as well (+600,000 tonnes), another larger-thanusual harvest in Australia and indications of similar supply from Russia and Ukraine (from crops planted last autumn before the war disrupted spring oilseed sowing), global rapeseed oil output is expected to rise by almost 1.9M tonnes or about 6.5%.

Amid lower palm and soyabean oil prices, this hoped-for recovery has already taken rapeseed prices down to their lowest level for over a year.

A wild card is the currently volatile energy market sending mixed signals to the biodiesel sector, on which rapeseed oil consumption depends so heavily. Crude mineral oil prices fell below US$100/barrel recently after months of seemingly endless rises.

Against the expected crop rebound, rapeseed stocks are seen dropping to their lowest level for many years by the start of the 2022/23 season.

So until Northern Hemisphere crops are harvested, more volatility cannot be ruled out.

Canada has not planted more canola as huge increases in input costs seem to have outweighed the gain in cash prices, especially with other, cheaper-togrow commodities also offering sky-high returns. Last year’s Canadian canola crop area increased by over 8% but a summer drought and heatwave collapsed yields by 40%. All now depends on a yield bounce but even with that, Canada is among producers starting with an unusually small carry-in stock – just 400,000 tonnes compared with the 3.5M/1.7M tonnes of the previous two years.

The Winnipeg futures market recently fell to C$830/tonne levels against the peak C$1,200+/tonne it hit in late April, while Paris futures dropped from €1,094/ tonne to €650/tonne levels. Rapeseed oil is coming down as well, with the USDA monthly average for June at US$$2,055/ tonne against US$2,223/tonne in April.

Ukraine still key for sunflower

Prices of crude sunflower oil on the Rotterdam market fell to an average US$1,777/tonne in June against a peak of US$2,570 after Russia’s invasion of Ukraine in February stopped that trade in its tracks.

The seasonal average to date is still around US$1,747/tonne against last year’s US$1,350/tonne and the previous 10-year range from US$719-US$1,404/tonne.

A return to anything like the old lows looks unlikely until the Black Sea conflict is resolved. The USDA expects Ukrainian sunflower oil production to plummet from last year’s record 17.5M tonnes to just 9.5M tonnes following a 35% fall in planted area and a 16% drop in average yields.

As we went to press, Ukraine and Russia had just signed a United Nations-backed deal to allow Ukraine’s wheat, maize and oilseeds to be shipped. However, obstacles still remain to moving millions of tonnes of crops from blockaded Black Sea ports including de-mining Ukraine’s coastal waters, ensuring the safety of seafarers and vessels, and securing adequate and affordable insurance to cover the transport.

There are large stocks of old-crop sunflowerseed and oil still waiting to be shipped out. However, the new crop gap will probably still keep forward prices of both sunflowerseed and oil firm.

Russia’s crop is expected to hold steady at around last year’s peak of 15.5M tonnes, implying another year of better than usual export availability, although much will depend on the extent and manner with which the government intervenes in the market with quotas and duties. Russia recently cut its sunflower oil export tax sharply to offset the rouble hitting multiyear highs.

The EU also expects another larger than usual harvest of around 10.5M tonnes while Argentina’s crop is seen rising from 3.35M tonnes to 4.2M tonnes after farmers increased planted area by around a quarter in response to high prices and sunflower’s less heavy needs for increasingly expensive fertiliser.

The USA has also raised its sunflower planted area by 25% this year to a sevenyear high of 1.65M ha.

By drawing down some of the past year’s sunflowerseed stocks, the USDA estimates that global sunflower oil output can still match or even slightly exceed last season’s 19.5M tonnes, with exports reaching 10.4M tonnes.

EU food industry majors are expected to shift some consumption of sunflower oil – normally about 4.3M tonnes or over a third of the EU food oil total – to rapeseed (18% or 2.3M tonnes). Last season, the EU imported 9.9M tonnes of vegetable oil including 1.6M tonnes of sunflower oil and 314,000 tonnes of rapeseed oil, as well as 5.8M tonnes of rapeseed and 1.15M tonnes of sunflowerseed, chiefly from the Black Sea region. ●