Optimists neglect sanitary reality.

Recently many reports talked about rising commodity prices, the most bullish markets in a decade, the super-cycle etc. Indeed, the Asian powerhouses are on a buying spree but also fear of inflation drives investors to find alternatives for their money. Vaccines, stimulus for the economies, hopes for demand recovery, La Nina-related droughts in Latin America, all prompted speculators to scramble to commodities, boosting prices to the highest in years. 

In the 2019/20 season the global consumption of edible oils and fats slightly exceeded production. The lower COVID-19-related-demand from out of home eating, biodiesel and other market segments was offset by a production decline of most oils. 

Today palm oil prices are at the highest in 8 years, while stocks are at their lowest since 2007 and likely to drop further as we advance in the seasonally lowest production months. The soybean carry out is at the lowest in years. China kept buying groundnut and linseed products and rapeseed and sunflower seed oil. The olive oil harvest was about 80% complete when a cold spell and snow storms hit central Spain and there’s a major production setback in Tunisia. Overall, everything feels tight. 

But the past days, prices eased on concerns about China reporting a 10-month high in Covid-19 cases as infections in the Heilongjiang province tripled. This generates large scale lockdowns and questions on the upcoming Lunar New Year celebrations, when millions travel home to spend time with family. Meanwhile France, the UK and the Netherlands took extra measures to combat the spread of the virus. All this weighs on the market. But just imagine what can happen when this is gone. 

My grandpa always said that the best cure for high prices is high prices and high prices always bring goods to the market. Further, some swing factors influencing supply and demand will be: 

The “Jo Biden Plan for a Clean Energy Revolution and Environmental Justice” will prompt his administration to address carbon emissions from transport in the U.S., and biofuels are first in line for the existing low-carbon fuel programs. In Europe, rising greenhouse gas reduction targets may boost biodiesel demand. But Indonesia and Malaysia may want to reduce their biodiesel ambitions at the current POGO spread (diff. Palm Oil-Gas Oil price). 

India and Middle East countries substitute expensive sunflower seed oil by cheaper alternatives. Theoretically, in tight markets with continuously fueled demand, when all substitutions are exhausted, all prices tend to converge, at the level of the most expensive product. That price will then rise till demand disintegrates. We’ll see, said the blind man, we live in interesting times. 

Petroleum rebounded strongly from its pandemic crash and rallied to new highs after Saudi Arabia surprised everybody by unilaterally cutting production. Petroleum has much to gain from reopening economies, but then Brent crude fell below $56, on worries about fuel demand due to Covid-19. Makes one think it’s too soon for yippee-ki-yay!