Correction or change of direction?

Correction or change of direction?

Your Bi-weekly update on edible oils & fats by Aveno
June 25th, 2021.

A black swan and improved weather

About two weeks ago the market got pushed further downwards by rumors, not facts. A black swan the market hadn’t seen coming: a story about plans to reduce bio-fuels admixture in the U.S., to prevent smaller petroleum refineries of going belly up. This multi-sided problem does not only concern diesel but also ethanol from corn for gasoline. There are as many voices in favor of increasing the biofuel mandates as voices to oppose. Help can be: giving money or lowering the blending obligation. Apparently, the refineries have liabilities in the region of $1.6 billion. So quite a problem and difficult to say how this will turn out.

The selloff of soybeans and oil intensified, dragging the rest of the market down. Speculators/investors/funds thought it was a good time for profit taking and liquidated positions.

News about improved weather conditions, where is matters, fueled anticipations of global oils & fats production increases. And counting on normal weather we may expect major growth in oilseeds production. Global vegetable oils production in the 2021/2022 season is seen to increase 4.7%. And global production of the 17 most common oils and fats is forecast to rise to 250Mmt!

The tone is set for weakness in global edible oils. But there are reasons to be a cautious optimist.

Do not expect a straight line downwards, expect hick ups, uncertainties like biofuel policies and weather market price volatility. The crops are not yet made and stocks are low everywhere. Production increase is needed to replenish stocks and to keep up with a growing demand from a growing population, a pull from biodiesel to save the planet and increased post-covid demand as economies re-open and travel picks up.

Special dynamics will interfere. Lower prices will trigger extra demand. Government interventions to combat food inflation or steer internal pricing are also a factor. With lower prices, India put on hold their intention to cut import duties on edible oils. And some analysts think China will increase its oil consumption by 1.5 Mmt in the 2021/2022 season. Funds can step back in and markets can overreact up or down!


Monthly average FOB export prices for crude oils.

Source: European Commission / IGC, Monthly average, close June 23rd

Soybean oil

Four months to go till the U.S. soybean harvest. Over 95% is in the ground and we are very early in the growing season. A lot can happen still. Over 30% of the sowings were exposed to dryness in the north east but that seems to be OK now. There’s been a report about higher-than-expected ending stocks this season and the past South American crop was revised upwards.

Palm oil

Since mid-May prices dropped 24% from their peak of 4506 Malaysian Ringgit/mt. In origins the lack of new destination demand is weighing on prices as are the increasing production and stocks. Indonesia needs to lower its export duty (used to fund their biodiesel program) in order to remain competitive. Palm oil prices may recover after this sharp correction as post covid demand and biodiesel policies may surprise (higher gasoil prices).

Rapeseed oil

In EU a lot of “yield confidence” emerged from the fields after much cooler-than-usual temperatures eased away and let crops develop better than average. In central EU the delay in winter crops (sown before winter), even helped avoid stress during dry periods. Most crops, so far, look excellent.

For EU-27 rapeseed, the forecast is a promising 3.23 mt/ha average yield or 5.6% higher than the five-year average of the 2016-2020 period. Last year the average yield in EU was 3.167 mt/ha.

This summer we expect to harvest 16.7 Mmt or 2% more than last year and the most since 2018. But still 5% below the five-year average as weather problems, an EU-wide ban on certain pesticides (neonicotinoids) and a growing reluctance of EU farmers to grow rapeseed had a negative impact on output in the past years.

Source: European Commission Joint Research Center dd June 21st

A good crop in EU might bring some price relief but there are still concerns over Canadian weather. The Prairies need rain to ease dryness and EU needs to import rapeseed to meet demand. Demand for biodiesel is expected to recover as diesel usage (with mandated biodiesel) goes up. The expected 5.8 Mmt of rapeseed oil for biodiesel equals about 14.5 Mmt of rapeseed and annual crush of rapeseed in EU is over 23 Mmt.

It would not be a big surprise if rape oil keeps it price level and keeps a premium over other oils as the situation remains tight.

Sunflower seed oil

Buyers are gone. It was too expensive and they either passed or covered something else elsewhere. With dropping prices and prospects of big crops no one is tempted to step in. In the 2020/2021 season the crop failure was a bullish factor and in the 2021/2022 season the opposite may happen. The market is waiting for the new crop to materialize.

One point of concern is that it seems that in EU less hi-oleic sun was sown because last year, at some point, the premium over classic sun eroded to zero because of a mismatch between supply and demand. That premium might come back.

USD and mineral oil.

The USD rose after the FED updated their long-term projections and mentioned potential higher interest rates in… 2023.

Petroleum is holding above $75/barrel on strong demand. This week the price for a barrel of North Sea oil (Brent) rose to $76. Brent gained around 50% this year, supported by OPEC production cuts and increased demand as corona restrictions are being phased out and air and road travel picks up. In the U.S. WTI (West Texas Intermediate) also hit its highest level for 3 years at $74.07/barrel when the American Petroleum Institute reported that crude oil inventories fell more than expected. Some boldly predict a $100 level soon. Undeniably demand is up but Iran oil may come on the market and OPEC can increase production; there is still lots of oil in the ground. But as travel picks up, demand for mandated blending with biofuels also goes up.

Always at your service. Please reach out to your regular AVENO contact for further inquiries.

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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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