Coming off the highs.

Recession fears which caused petroleum, stocks and currencies to tumble on financial markets spread to agricultural markets where in recent weeks prices went on an irregular but downward trend.

Generally speaking, market themes remain unchanged: lockdowns in China that increase the probability of demand destruction, pushing prices lower; inflation and higher interest rates; the war in Ukraine, unpredictable Russian gas supplies to EU… all combined often leading to a sell off.

Before covid edible oils & fats prices were on an uptrend and we’ve seen two consecutive seasons with a higher global consumption than production. The past year markets were tight because of low overall inventory at the start, a poor Canadian rapeseed crop, more soybean oil use in the U.S., the war in Ukraine killing near 30% of global sunflower seed oil supply, labor shortages in Malaysia, drought related losses in South America and strong biodiesel production in some countries. So, we saw change in trade flows, shifts in usage, higher prices and ultimately price driven demand destruction.

It took a while for demand destruction to seep in the market. Countries like Iran, India, Middle East and northern African countries and even China consumed less oils and fats. This resulted in depleted stocks and pent-up demand and sustained prices.

In an uncertain economic environment and anticipating a growing production, even exceeding the projected consumption, prices trended lower -although still at historically high levels. Was the recent drop overdone? As always, probably yes! Is the downward trend broken? Maybe not. Prices may bounce back before diving or prices may bounce and stay up. A weather market may also spoil it.

China and biodiesel

Mixed signals came from China as the “mortgage boycott” problem surfaced: house buyers default on their loans because during the housing boom residential dwellings were sold long before completion and now many real estate developers don’t have the cash to complete the projects and banks already had problems with developers defaulting or asking their debtholders longer credit. This may jeopardize the stability of Chinese banks.

A rise in Covid cases also caused more lockdown concerns. Some businesses are unable to reopen and port congestions keep building. The USDA reported on lower soybean imports this and next season and also oil imports were down. On the other hand, we hear of better margins for pork production and of a higher projected animal feed production (more soybean meal). China has depleted stocks, so need to watch closely what they do.

In some countries it is more rewarding to use edible oils & fats for energy purposes than for food: e.g., in Argentina there is a shortage of mineral diesel. And then there is the rapidly rising biodiesel production (soy, tallow, corn, palm...) in the U.S. where large mineral oil refiners have made supply deals with so called agro-giants. This season the U.S. uses 25.5Mmt of oils, 1 million more than last season on account of biodiesel production. Imports are 5.9Mmt vs. exports of 2.3Mmt. Exports will eventually drop to zero and imports may rise further; the capacity to produce is built.

MARKETS

Soybean oil

The last USDA report showed less production, less demand and higher ending stocks. Current hot weather in parts of the U.S. is cause for concern… weather market.

Rapeseed oil

Crushers are in maintenance downtime or running other raw materials as the supply of rapeseed is bad. In 2-3 weeks, the market hopes for a maximum crush of the new crop of rapeseed.

Palm oil

Ironically, since Indonesia set an export ban in order to lower domestic cooking oil prices, tanks are flowing over and authorities want to shortly increase the biodiesel blending mandate from B30 to B35 in order to reduce stocks… or adapt export taxes.

Since the historical high of Malaysian Ringgit 8000/mt was hit begin march the Malaysian market lost 50% of its value to reach MYR 4000/mt mid-July, a level not seen since July last year.

Notwithstanding the recent price drop palm may not rebound until…? Buyers keep sidelining, dancing the Limbo, to see how low they can go before satisfying pent-up demand: price go unda limbo stick, all around the limbo clock. Hey, let's do the limbo rock!

USD, mineral oil and biofuels.

€ dropped to parity with the $ for the first time in 20 years. War in Ukraine, unpredictable gas supplies to EU and U.S. interest rates offering a higher return, make the $ a good safe haven. Basically, the Euro is pulled down by poor economic prospects in EU. Energy issues weigh on the economy making it harder for the ECB to tighten the money supply.

Are the bears back?

High prices in a deteriorating economic environment started to curb demand. Hedge funds sold their mineral oil products positions, reflecting their doubts on global economic growth. The outlook remains uncertain. West Texas Intermediate and Brent both fell well below $100 but an upside risk and volatility remain. Some speculators will remain bullish because they were born a bull, others are bears and both can win this fight.