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

Commodity prices expected to ease.

In its latest biannual ‘Commodity Markets Outlook’ the World Bank forecasts a general, worldwide, and average ease of commodity prices. Slowing growth and fear of global recession are weighing on prices, but prices are expected to remain well above their five-year average. Energy prices may fall by 11% in 2023. Agricultural commodity prices are expected to fall by 5%. But this outlook is subject to many short- and medium-term if’s and but’s; the only certainty is uncertainty.

One example of high prices being the best cure for high prices (by bringing new production or killing demand) is global fertilizer prices dropping as farmers cut back on their use. High prices of urea gradually killed demand: in India, Brazil (the world's second largest buyer after India) and EU, demand for nitrogen fertilizers is down. But fertilizers are needed to grow crops…

Another one is a weak currency vs. the USD. High commodity prices and rising interest rates are killing demand for grains and oilseeds in developing countries whereby global trade may drop a couple of per cents, bringing prices down. Locally though, prices remain high in many economies as a result of currency depreciations vs. the USD, which aggravates food and energy crises in a number of countries.

Then there are weather concerns. The edible oil sector strengthened somewhat by the development of the (natural) La Niña weather phenomenon in Southeast Asia, which threatens palm oil production. In South America too, weather is cause for concern: rains in Brazil damaged recently planted soybean fields and some parts of Argentina remain too dry. The Mississippi water level is expected to drop further, hampering transportation of 90% of U.S. agricultural exports.

In most parts of EU normal autumn weather allowed a good progress in harvesting summer crops and sowing winter crops like rapeseed. But, the impact of the dry summer also became clearer: the yield forecasts of some crops like sunflowers and soybeans were further reduced. And olive oil prices continued to rally on lower productions!

Markets are nervously awaiting Russia’s decision to extend or not the “grain and oilseeds export corridor deal” which expires on November 19th

MARKETS

Soybean oil

The U.S. processing of beans dropped to a seasonal low in September just ahead of the new crop. Meanwhile domestic demand for oil from the biodiesel industry remained strong and supported prices well above South American oil! The harvest is progressing well and is 80% complete compared to the 5-year average of 67%, probably surpassing 90% next week.

Soybean prices struggled to break above $14 a bushel but there was not enough demand: China is not hungry and a rising number of bird flu cases curb soybean meal demand.

After President Xi Jinping's re-election victory came reports of a sharp increase in Chinese Covid cases, pushing authorities to impose additional lockdown measures in a number of cities, which is not helping the economy nor bean consumption.

The Mississippi water level is unlikely to return to normal soon as weather in the U.S. remains warm and dry in most areas.

In Brazil, the most optimistic experts forecast a bean crop over 154Mmt but for the moment, floods in several areas are delaying plantings, though other regions experience a normal planting pace.

In EU low crush margins for beans favor crushing rape and sun which may lead to more crushing in the America’s and importing more meal into EU, crippling the supply of bean oil in EU and thus support the price of the oil. Animal feed producers can easily switch to sunflower seed oil.

Palm oil

Palm prices recovered in the last 4 weeks because there was an increased global buying wave (India stands out), generating record exports from Indonesia. At the same time, Malaysian operators confirmed a recovery in palm oil exports the first 25days of October.

Heavy rains caused floods in both Indonesia and Malaysia and an unsolved labor shortage problem in Malaysia as well as firm soybean and sunflower seed oil prices also supported palm oil.

It seems the market is moving sideways and possibly downwards again, depending on energy prices and evolution of other edible oil prices.

Rapeseed oil

In France, the rapeseed sowing had a good start at the end of August with ideal weather conditions but other EU countries (Germany, Poland, etc.) had weather related delayed sowings: it was too dry or too wet. Then in September some parts of EU enjoyed colder-than-usual and rainy weather delaying plant development. Optimal conditions are required for the rest of autumn to secure a good development before winter dormancy. A mild October is thus a good help for a record crop next year.

In Ukraine and Romania, sowing was delayed due to the late harvest of winter grains. But beneficial rainfall arrived timely to provide enough soil moisture for germination and early development.

Weather in Canada has been favorable for harvesting before the arrival of winter and most is in and yields look OK.

Rapeseed prices continued to strengthen on strong domestic demand and competitiveness vs. import origins. The crush margins are better and the less soybeans are crushed. It is also expected that the rapeseed OIL demand from the biodiesel industry will be strong this season because there are expectations for supply problems of mineral diesel availability and there are new regulations entering into force phasing out palm oil as a biodiesel feedstock in several countries. And there is less soy oil.

In a press release on Tuesday Italian ENI said: “Eni has definitively ended the procurement of palm oil for use at the Venice and Gela biorefineries for the production of hydrogenated biofuels. The last shipments arrived in the last few weeks, ahead of the declared goal of becoming 'palm oil free' by the end of 2022.”

Sunflower seed oil

As Ukraine accounts for about 30% of global sunflower seed production the resumption of exports from Black Sea ports contributed to an improved supply. Not only did Ukrainians surprise the market with alternative export routes for their old crop but also the better-than-expected new crop under war conditions helped ease prices and availability. Despite inspection delays of ships, the grain corridor agreed with the Russian aggressor, helped relieve tension.

But tension returned to the market and prices appreciated especially in Black Sea locations where some tightness arised. Markets are nervous too about prolongation of the “grain and oilseeds export corridor deal” which expires on November 19th and possibilities of escalation in the war. And in EU recent crop yields were reviewed downwards due to the long hot summer of 2022:

On the other had there are large stocks of seeds in Bulgaria, Romania and Hungary and a record crop is being harvested in Russia. So, all going well, this firmness may be temporary.

USD, mineral oil and biofuels.

On Thursday, the ECB decided to raise interest rates by 75 basis points amid difficult economic conditions (September inflation at 9.9%, manufacturing and services sectors in decline, low confidence levels). At the press conference the ECB, announced further interest rate hikes, but the size and scope were not disclosed. Whereafter the euro strengthened to above parity. The next ECB monetary policy meeting will be held December 15th

Full scale Armageddon over middle distillates?

In EU (net importer of diesel, jet fuel and heating oil) inventories of middle petroleum distillates are low. High natural gas prices prompted switches to gasoil, while others stopped using Russian diesel (50% of diesel imports) and the ban on Russian oil will take effect in December.

Shortages are spreading in the U.S. too, where inventories have been falling for months. According to the EIA, the U.S. now carries just 25 days of diesel supply. A lack of refining capacity and years of underinvestment in new capacity, combined with refinery shutdowns, contributed to the current situation. (Some refineries were even converted to bio-diesel/HVO production in the U.S. and EU).

Gasoil shortages in EU and the U.S. could inflame fuel prices this winter, adding more inflation, and could spark a global battle for middle distillates. This sounds very bullish for biodiesel!

Even though in EU natural gas prices fell to around €100/kwh, there is no place for complacency. € 108.50/kwh is still 9 times more than in January 2020.

In the army summer always starts April 1st but plumbers know the heating season lasts from October till end May and farmers always say: “Is oktober warm en fijn, het zal een scherpe winter zijn.”