Change of focus: from supply to demand destruction in food and nonfood markets

Your Bi-weekly update on edible oils & fats by Aveno

April 24th, 2020

Since mid-March, global edible oil markets are marked by market distortions as a result of the Covid-19 virus pandemic, as well as a decreasing demand for petroleum products. This situation shook up old certainties and future developments are subject to considerable uncertainties. Low commodity prices are generally an indicator of an economy in bad shape and often a bad economy will leave consumers with less disposable income, especially in “emerging markets”. According to Oil World this may even reverse the growth trend of per capita consumption of oils and fats. No one could ever have anticipated this pandemic's scale and impact on businesses across the globe and when in unchartered territory, smart explorers don't run, they walk cautiously. 

Source: Trading Economics 

The ‘virus’ and the Saudi-Russia oil war hit petroleum markets hard. This week we witnessed a negative-price-nightmare for crude oil in the U.S. of A. Crude oil futures of West Texas Intermediate petroleum dropped to nearly minus $40! There is just too much crude nobody wants at this moment. But sooner or later fundamentals always find a balance and the longer the price stays cheap, the less producers can make a living out of pumping oil. Eventually, helped by deliberate production cuts and the ‘natural adjustment’ of production, supply will fall to levels closer to demand. Eventually demand and prices will recover and with rising tensions in the Middle East, petroleum may skyrocket again, taking everybody by surprise. 

In these uncertain times the world starts to focus on the overall (direct and indirect) fading demand, from biodiesel to food service and everything in between. 

The French Groupe Avril announced they temporarily closed three of their six biodiesel plants as in the past weeks a 60% decrease in diesel-vehicles on the roads slashed demand for biodiesel blending. Avril is also a rapeseed crusher and vegetable oil producer and the volumes intended for biodiesel production became available for other markets: "We are trying to find outlets to export the oil” they said. Apparently, China bought oil and it was reported that some 100.000 tons of crude rapeseed oil will be shipped from EU in the coming months. Needless to say, that also other European biodiesel producers have cut production. This is a rather bearish picture for rape oil; or at least a more balanced picture. 

Source: European Commission / IGC, Monthly average crude oils close April 23rd 

While some focus on too much rapeseed oil others focus on the availability of rapeseed. Many mills are sold out exceptionally early this year and another shortage in rapeseed supply is expected for the 2020/21 marketing year. Expectations of another sub-standard rapeseed harvest (starting in June if all goes well) make oil mills try to procure supplies for the coming season well in advance. But farmers are not selling because the corona crisis causes uncertainty, the planted area is not big, the price level is not attractive, the crop development is uncertain because there has been some winterkill in certain regions and because of the dry weather experienced in some growing areas. This is potentially a very bullish picture. 

For palm oil there is a predominant bearish picture: low petroleum prices make the Malaysian and Indonesian biodiesel projects unattractive, less disposable income in the emerging markets kills demand, soon we will enter the higher production season and stocks will grow, etc.…. and in the vegetable oil market pricing is strongly influenced by the level of palm oil prices, thus weighing on the whole oils & fats complex. 

In week 16, just after Easter, the average EU-28 butter price of €295/100 kg had lost 10% in four weeks. Below graph shows the evolution of the official Dutch butter price from the “ZuivelNL/DairyNL”-organization which seems to have bottomed out around Easter at €255 and which since then gained €2/100 kg. 

Source: Nieuwe Oogst