Record highs in 2022

COMMODITY PRICES

Record highs in 2022

Never has the oils and fats market seen such high prices either in Malaysian Ringgits or US dollars as witnessed in 2022, Dorab Mistry, a director at Godrej International, told the Palm & Lauric Oils Price Outlook Conference & Exhibition (POC2022) in Kuala Lumpur on 7-9 March.

Even the humble by-product – palm fatty acid distillate (PFAD) - reached US$1,790/tonne and palm oil briefly became the costliest vegetable oil on the market.

“How did we get here?” Mistry asked, outlining a range of macro factors that had affected vegetable oil supply including: • Two successive La Niña weather patterns in South America resulting in decreased rainfall and drought in

Argentina and southern Brazil, affecting soyabean crops. • Very low canola and rapeseed crops • The heavy export levy and tax regime in Indonesia affecting palm oil exports • A critical labour shortage in Malaysia impacting harvesting and production • The COVID-19 pandemic leading to the closure of palm oil mills • Eating at home replacing dining out consumption • Successive reductions in import duty by India Russia’s invasion of Ukraine then lit a fuse in the oils and fats market.

“High prices and a prolonged bull market had already led to ‘just in time’ and hand to mouth coverage by importers and we now have a perfect storm.”

While vegetable oil prices have hit record highs this year, there may be a dramatic fall in commodity prices later in 2022 because of falling demand, with energy self-sufficiency becoming the new mantra Dorab Mistry

Implications of invasion

Mistry said that damage to ports and infrastructure in Ukraine meant a lag of at least four to six weeks before exports could resume. There were also problems with Russian exports, meaning supply from the rest of the world had to increase.

The most bullish agricultural commodities would be wheat and corn, and sunflower oil would also be very buoyant in the vegetable oil market.

Meanwhile, energy prices would fuel biodiesel profitability, while fertiliser prices and availability would be a problem.

The Russian economy would almost certainly be driven into a recession.

“All bets are off while the conflict

Oil

Soyabean oil Palm oil Sunflower oil Others

Total

2012/13 1,090 8,240 980 –

10,670

Table 1: Indian imports of vegetable oil, ‘000 tonnes 2020/21 2,880 8,210 1,950 450

13,490

Oil

Soyabean oil Palm oil Sunflower oil Others

Total supply Total demand 2020/21

+1,000 +1,000 +1,000 –2,000

+500 +2,500

Table 2: Vegetable oil incremental supply and demand, ‘000 tonnes

Oil

Food demand

Energy demand Table 3: Net effect – food and energy demand 2020/21 +1.5 +1.0

2021/22

3,600 6,950 2,200 250

13,000

2021/22

+1,000 –2,500 +3,000 +2,500

+4,000 +2,500

2021/22

+1.5 +1.0

Source: D Mistry, POC 2022

Source: D Mistry, POC 2022

Source: D Mistry continues. It is impossible to forecast prices while a war is raging and new sanctions are announced periodically. We are in for a wild ride.”

Mistry said that high energy prices could prolong and fuel inflation all around the world and 2022 could be a year of stagflation, when inflation was high, economic growth slowed and unemployment remained steadily high.

“Stagflation may inevitably lead to recession but recession and high commodity prices are not compatible. Therefore in the second half of 2022, we may see a dramatic fall in commodity prices including those of energy – simply because demand may fall.”

Palm oil

For palm oil, particularly in Malaysia, production problems would continue, with Mistry forecasting a production level of just 19M tonnes.

“The critical labour shortage will not be alleviated, wages will have to rise substantially and the cost of production will rise dramatically.”

Mistry said Indonesian production should increase by at least 2M tonnes and the government may need to re-think its export levy, B30 biodiesel blending level and domestic market obligation policies.

“The Indonesian government may face a backlash from voters if domestic prices do not fall and a reduction from B30 to B20 for one year could be a win-win for all.”

Rapeseed

Mistry said the market could expect a recovery in rapeseed production in Europe and Canada.

“Indian mustard seed production hit a new high this year but, next year, we may not have the ideal combination of optimum weather and prices.

Black Sea rapeseed supply would be a problem due to the Russia/Ukraine conflict.

Soyabean

not great while corn and wheat looked more bullish.

“I estimate the Brazilian crop will be around 125M tonnes and Argentina’s around 41M tonnes. Relief will only come from South America in late 2022-early 2023 if plantings increase.”

Sunflowerseed

For sunflowerseed, the Black Sea production belt was now the conflict zone.

“We shall carry forward stocks of sunflowerseed into the new season but sowing of new crop starts in April and is likely to be affected. We must be pessimistic on the Ukrainian crop for harvest in August 2022.”

Major edible oil importers

Mistry said China faced a problem in sourcing corn and, to some extent, soyabeans and was likely to try and pump up growth in its economy.

“China will not be immune to a slowdown if the world slips into recession and will be actively sourcing palm oil in 2022.”

India had aggressively lowered its vegetable oil import duty, with high prices stimulating domestic production of oilseeds.

“The Indian economy in the first half of 2022 is growing fast but it will not be immune to a worldwide slowdown.”

The country’s vegetable oil imports were forecast to fall this year (see Table 1, previous page).

Growing demand

Mistry forecast world vegetable oil demand growing at a steady 3M tonnes/year.

“In 2020/21, world food demand grew by less than 2M tonnes after having shrunk due to COVID-19 the previous year. In 2021/22, demand should expand by 1.5M tonnes from the 2020/21 level.” (see Table 3, previous page).

World energy demand, meanwhile, grew in 2020/21 by about 1M tonnes and was projected to further increase in 2021/22 due to capacity expansion, but only by 1M tonnes due to very high prices (see Table 3, previous page).

Outlook

In the short term, Mistry said that Black Sea sunflower oil exports of at least 600,000 tonnes/month would need to be replaced, creating a very bullish situation for the product.

“Volatility will be high as news will sway prices and all over the world, corn and wheat will attract acreage.”

High prices would lead to some demand destruction.

Post Ramadan (1 April-1 May), palm oil production would pick up and weigh on prices.

“Prices could fall sharply from May onwards as interest rates rise, production picks up, stocks around the Black Sea are unfrozen and economic growth slows down.”

Bursa Malaysia Derivatives (BMD) thirdmonth palm oil futures should decline to Malaysian Ringgit 5,000 (US$1,185)/ tonne and eventually to Malaysian Ringgit 4,000/(US$948) tonne by September.

For lauric oils, which were much more linked to economic growth, prices should begin a descent post-Ramadan and settle around $US1,200-1,500 cif Rotterdam. Coconut oil should also regain its premium over palm kernel oil.

A world economic slowdown would weigh on prices and energy selfsufficiency would be the new mantra in 2022.

“Depending on Brent crude oil prices, biodiesel production and demand will remain strong. This will be a huge support and will prevent vegetable oil prices from declining too much.” ●

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