Catch-22 and uncertain productions.

Catch-22 and uncertain productions.

Your Bi-weekly update on edible oils & fats by Aveno
August 6th, 2021.

Heatwaves, droughts, floods and frost threaten food supply.

In the past weeks many extreme weather events in production regions around the globe were front page news.

It is now winter in the southern hemisphere and an unusual sudden and rapid frost hit Brazil's coffee belt. Coffee trees are very sensitive to frost that can severely damage and even kill trees. In Argentina the Parana, “the water highway for grain and soybeans”, water level fell to a 77-year Low. The river originating in a drought-stricken part of Brazil, carries 80% of Argentina's agricultural exports. It is now peak export season for soy and corn and ships from Rosario are sailing with 25% less cargo than usual.

Western Canada and the northern U.S. had temperatures of just under 50°C. In Russia unusual hot dry weather and consecutive heatwaves stressed the corn and sun flower seed crops.

In central China, in the province of Henan, certain places, got as much rain in a few days as normally in a year and more than 200,000 hectares of agricultural land was flooded. Henan also accounts for 25% of the Chinese production of peanuts where China accounts for 33% of global peanut production and we already saw some impact on groundnut oil prices.

In northern EU a wet July hampered the harvest of winter crops with limited impact on yields. Western EU had average to wet conditions, south and south-east EU had hot and dry weather. But heavy storms occurred in several parts of Europe, locally damaging crops.

High prices are killing demand and driving hunger.

Recent USDA and U.N. reports mentioned that in 2020 the world reached the highest level of global food insecurity in 15 years on account of a pandemic-induced drop in disposable income. This income loss makes ‘healthy diets’ unaffordable for 10% of the global population.

This worsens in 2021 as commodity inflation and disrupted supply chains drove food prices to their highest levels in 10 years. This is bad for poor countries depending on food imports and 1.2 billion people are reported to be food-insecure this year.

In Asia, Bangladesh, India, Pakistan, and Indonesia, will see the most significant rise in hunger. But also, Africa (Zimbabwe, and Congo with more than 80 per cent of the population going hungry) and Latin America will see more hunger.

In India poultry producers are going out of business because high feed costs (soybean meal and oil) don’t leave a margin when raising chickens. In the U.S. the American Bakers Association asked the Biden administration for reduced biofuel blending mandates because “using fuel made from crops increases the cost of donuts, bread and other foods”. And they fear shortages of soybean and rapeseed oils!

Tight supplies limit price drops.

Sometimes it feels like the commodity boom is running out of steam. High prices start to be very heavy. But price formation comes from markets anticipating ending stocks in the future, at the end of this and next season. Markets are anticipating a production surplus for the oct 21-sept 22 season. But without buffer stocks we can’t afford poor yields and small crops. For now, low stocks everywhere are thus limiting further significant price drops.

If prices drop, more people will buy; demand is there. If biodiesel mandates go up demand increases, if China keeps buying in style that will drive up prices, if covid disappears demand will go up. Looks like mutually conflicting or dependent conditions: a perfect catch-22 shituation.


Soybean oil

Weather is the driving force and there is a lot of nervousness and volatility due to extreme weather in some parts of the U.S. but some production regions seem to be good. We’ll have to live through august and watch the Chinese buying behavior. Even a good crop in the U.S. will not be enough to replenish stocks. Long term there is hope for a bumper Brazilian crop in march/April 2022. But that is still far, far, away. Global soybean oil production accounts for 25% of all edible oils & fats production.

Palm oil

Global palm oil production accounts for 32% of the global edible oils & fats supply. The good news is that production and stocks are still rising but not enough to replenish tight supplies. Normally we should see a rise in production and stocks starting in February and peaking in September…. so far production recovery is weaker than expected. Prices also follow other major oils like soy and rape.

Rapeseed oil

Canadian heatwave caused irreversible damage to rapeseed crop. The crop which was once estimated at 20.2 Mmt is now estimated at anything between 13 and 15 Mmt. Time will tell what became of it. Canadian prices for rapeseed are much higher than in EU and already EU rapeseed was sold to Mexico. China has been buying rapeseed oil in EU.

In EU the harvest is underway and there’s been a downward revision of the crop estimate as reports of lower yields in Germany and Poland rolled in. There’s been an expansion in area of 3% for this crop but yields fail to meet expectations due to unfavorable growing conditions. The harvest could still be 16.9 Mmt, more than last year.

However, EU needs imports to meet its core demand for non-GM-food oil (and aquaculture in Norway) and for biodiesel and Norwegian bunker fuels.

It is expected that rapeseed oil will keep an increasing premium over soy and sun. Global rapeseed oil production accounts for 11% of global oil supply.

Sunflower seed oil

As soy, so far, is neutral, palm is disappointing and rape is a potential disaster, all eyes are on sunflower seed oil, good for 8% of global oil supply, to remediate the situation somewhat. But we need to see a large discount to rapeseed and other oils to buy more market share. This could happen when prices come under selling pressure once the harvest gets underway (end September-early October). Till now, generally, it looks OK except for need of rain in Russia. Let’s hope the weather gods are on our side!

USD and mineral oil.

OPEC+ members reached an agreement to produce more oil. But demand concerns pop up as the U.S., China and EU have a spike in delta-variant-covid-19 cases, which curbs demand in “the peak summer driving season” and limits air traffic. Tensions in the Middle East seem to outweigh increasing stocks and demand concerns. Nonetheless the market is seen tight if and when economies fully recover from the covid-19 crisis.

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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