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

May 28th, 2021.

Credit is a major driver for commodity prices and all commodity markets experienced a major boom sparked by the massive stimulus (free money) of the world's largest economies.

Oils and fats prices rose by food demand from growing populations, from more affluent societies and from biofuel producers. World demand increased whilst production did not follow.

Recently soy and palm hit record highs on tight global edible oil stocks and weather concerns for new crops and because Malaysian palm plantations depend on foreign manpower hindered by a prolonged hiring freeze owing to Covid-19.

Covid-19 and high prices caused lower demand from countries that can no longer afford it. That lower demand was offset by consumption increases in countries with money (or credit) like the U.S. and China. During the last three, each season, China added about 1 million mt to its consumption!

So, many buyers sidelined and have been buying hand to mouth, hoping for better times. Hoping production will catch up soon.

Improved weather in growing regions (e.g., rain for seed germination) led to profit taking and selling off long positions. This week China also announced measures to prevent speculation, to curb the price boom of commodities. Some analysts suggested this might be the beginning of the end of the recent commodity boom, as the government is tightening credit.

It might have a deeper impact on metals and lumber than on agricultural commodities: new crops are not yet made; stocks are at record lows and despite corrections we are still on high ground.

As the world struggles to emerge from the pandemic, many governments push for a climate friendlier future. But the energy transition clashed with another global challenge: growing population and skyrocketing food prices. Even in EU, politicians start worrying about the social impact of the Green Deal.

While countries, like Brazil, are reducing expensive biofuel mandates, others expand. Demand for vegetable oils in the U.S. is growing so fast they risk evolving from a surplus to a serious deficit situation soon and Biden's Climate Plan, might increase sixfold America’s renewable diesel production capacity by 2024.

Undoubtfully the debate of food for fuel will be served at the table again, soon, whilst biofuels will continue to support prices.

We have traveled a long and fascinating route, but we are not out of the woods yet… could well be a short-lived correction.

U.S. soybean planting is 75% complete and short-term weather outlook is good, which pressured prices. Funds cashed some of their long by selling 10.000 contracts of soybean meal and soybeans, but they bought 7.000 contracts of soybean oil. Chinese crush margins are still negative. Historically, these corrections are still marginal.

In an effort to halt Covid-19, Malaysia imposed stricter measures with immediate effect. All sectors of the agri-food industry such as palm oil, cocoa, pepper, biodiesel, etc. are only allowed to operate with a maximum of 60% of the workforce. Similar measures early 2020 already limited palm oil production by lack of manpower which contributed to rising palm oil prices. Also, the growing number of older trees in palm producing areas are a concern as they yield only 70% of their optimal potential.

Canadian and Australian plantings are progressing well now and recent rains were beneficial. Australian plantings are said to increase from initial planting intentions, which may grow the crop by an extra 1 Mmt. In EU Matif traded lower following weaker palm and soy but also in reaction to a potential bigger Australian production.

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