Coronavirus triggered traders and investors to hit the panic button

Coronavirus triggered traders and investors to hit the panic button.

Your Bi-weekly update on edible oils & fats by Aveno
February 7th, 2020

Wise caution or overreaction? An excuse or “black swan”?

Shortly after the signature of the phase one trade deal with China most commodity and equity markets took a dive reflecting the impact of the coronavirus outbreak in China.

Overall it is near impossible to predict the impact on Chinese domestic demand for imported agricultural products due to local supply chain disruptions. It is also hard to judge the impact, for other industries, on globally inter-connected production chains.

But demand suffers when many avoid public spaces and reduce their shopping and restaurant visits and when airlines cancel flights. Several big cities are quarantined and travel is difficult or impossible and some businesses are shut down…., dampening demand for meat and fuel just when China should have been celebrating the Year of The Rat and typically when consumption of food rises. This is lost.

Cheap coffee

One consequence is much cheaper coffee! Since January 10th the price of coffee fell by nearly 18%. which coincided with increasing concerns about the outbreak. The two largest coffee chains in China, Starbucks and Luckin Coffee, decided to close massively. Starbucks decided to close 2000, or more than half, of their Chinese shops. As a result, the demand for coffee from China dropped, causing the price to fall. In recent years, China grew into a major player in the coffee market.

Source: European Commission / IGC, Monthly average close Feb. 6th

Market evolution in the past 2 weeks

(running month + 3 = MAY position, refined, in euro):

Sunflower seed oil decreases about € 50/t. Palm kernel oil decreases about € 40-65/t. Coconut oil decreases about € 30-80/t. Soybean oil decreases about € 45/t. Palm oil decreases about € 15-20/t. Rapeseed oil decreases about € 30/t. EU average butter price is moving sideways. Groundnut oil increases about € 70/t.

Meat demand and soybeans in Chicago.

What scares investors and traders can also spook the cattle market: fears arise that a lockdown of major Chinese cities will limit demand for US meat! And the market is now concerned about China being able to keep its promise, made under ‘phase-one’, to buy for billions of dollars of US agricultural goods. Soybean futures on the Chicago Board of Trade (most sensitive to changes in Chinese meat consumption) suffered also since mid-January, when news of the outbreak started to hit western media. So far, the meat market’s concern is short term, not long term.

Palm oil exports to China stopped temporarily

The Indonesian Palm Oil Association just announced that Indonesia is likely to use 8.3 million tons of palm oil to meet domestic demand for biodiesel this year and voiced concerns that there will be less palm oil left for export. China, the world's second-largest economy was Indonesia's largest palm oil client last year (6 million MT) before India (4.8 million MT), the European Union (4.6 million MT) and Africa (2.9 million MT). Now the situation in China is likely to hamper Indonesia's palm oil exports as all export activities to China have stopped temporarily.

Temporary price setback for edible oils and fats looks overdone.

So far, fears outweighed the fundamentals in our markets. The coronavirus story is not over yet, but we continue to be reminded of tight fundamentals like a shortage of rapeseed this season and a poor crop next year and declining palm oil export supplies plus low palm oil stocks in both Malaysia and Indonesia. Palm oil recovered this week when Malaysian palm oil futures went up because of the expected report on ‘January ending stocks’ to drop below two million MT, the lowest level in two years, and due to fading concerns over the coronavirus.

There is some bearishness in the soy complex because of the big South American crop in the make and because the situation in China will delay the “export boom” of US goods to which China has committed. But soybeans benefitted Wednesday from spillover strength from global equity markets and from heavy rains expected in Brazil, that could slow the soybean harvest.

Wall Street equity markets soared on reports that scientists have developed an effective drug against the fast-spreading coronavirus…. And Wall Street closed at record highs after China announced a cut in import tariffs on US goods!

Brent crude petroleum price February 6th: $ 55.1677/barrel

Source: Trading Economics

Petroleum prices drifted lower on concerns about global economic growth and China’s energy needs. But now lower petroleum prices are seen as positive to fuel the global economy again. Every cloud has a silver lining or how markets grab every opportunity…

Euro vs US Dollar

EUR vs USD evolution 1 January 2019 to 7 February 2020

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Unless otherwise mentioned the crude oil values quoted in these documents are prices landed in EU without import duties, handling, storage, financing, refining, packing, transport or any other cost related to bring the product to market. They are used as market trend illustration. Substitution of oils is possible but different oils have different fatty acid profiles and are not all interchangeable for all applications. One can make biodiesel from all oils and fats but one cannot make mayonnaise from coconut oil. This document is exclusively for you and does not carry any right of publication or disclosure. This document or any of its contents may not be distributed, reproduced, or used for any other purpose without the prior written consent of AVENO. The information reflects prevailing market conditions and our present judgement, which may be subject to change. It is based on public information and opinions which come from sources believed to be reliable; however, AVENO doesn’t guarantee the correctness or completeness. This document does not constitute an offer, invitation, or recommendation and may not be understood, as an advice. This document is one of a series of publications undertaken by AVENO and aims at informing broadly a targeted audience about the edible oils & fats market. AVENO’s goal is to keep this information timely and accurate however AVENO accepts no responsibility or liability whatsoever with regard to the given information.

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