Difficult to read

The global market for edible oils and fats of vegetable and animal origin as well as the state of local and global economies have become very difficult to read, let alone to predict. Mixed signals come from the markets and many issues are currently hidden or in the background and risk sooner or later coming back to the foreground. To cite just one example: the debt problems of many governments.

A bearish sentiment prevails for now in many markets especially on South American soybean supplies entering the market, coupled with continuing concerns about demand... global demand mostly driven by population growth and gross domestic product, or the state of the economy: a lot of people with a lot of money consume more food and travel more and farther.

Given the forecasted growth of oilseeds and vegetable oil production this season (217.5Mmt of oil) global supplies are expected to be ample. Consumption is also expected to grow, but a bit above production, resulting in a balanced situation due to enough stocks. But not much is needed to bring the situation out of balance. And to make things a little less simple: a growing part of global demand is on account of biofuel production which is mostly (ESG-)policy driven.

Several economists think there is a good chance that more than one economy in the world will this year, to some extent, experience a period of negative economic growth. A recession corresponds to at least two consecutive quarters of decline in GDP, which in complex economies (with winners and losers) is harder to pinpoint and quantify.

We had Chinese manufacturing activity contracting for the fifth consecutive month in February and we’ve had reports on the economy in India (world’s most populous country, largest importer of edible oils and fats and third largest petroleum importer + consumer behind China and US) growing more than expected. In EU and US there are signs of a cooling down with a rise in cost cutting exercises and job lay-off announcements from big companies.

In the eurozone it is not clear whether the glass is half full or half empty. The strength of the labor market, contributing to persistent wage pressures, remains surprising in a, since late 2022, stagnating economy. The post-pandemic recovery stopped suddenly when the Central Bank raised interest rates and household purchasing power collapsed.Demand for goods is sluggish and inventories remain high. The European Commission forecasts slower-than-expected growth as the economy continues to struggle with inflation and interest rates.

For the US some believe it is heading for an unavoidable recession while others believe in a ‘soft landing’. And there are doomsday thinkers pointing to the phenomenal growth of the national debt. With the current Fed rate, interest charges are growing just as quickly and a growing share of tax revenue is used to pay interest charges. Unlikely government savings or interest rate cuts may bring some relief, but strong economic data and inflation keep the prospect of lower rates at bay in the near term. Something will have to break.



Petroleum prices also influence edible oil prices and in recent weeks Brent futures traded between $81 and $84/barrel. Price movements were strongly influenced by mixed economic indicators and interest rate policies since higher interests, aimed at limiting inflation, may dampen economic growth and energy demand. But recent gains in stock markets backed optimism for global energy demand. Then there is the risk of supply disruption in the Middle East and OPEC+ considering to extend a voluntary production cut which could both support prices. Stock building in the US and talks of a potential ceasefire agreement in Gaza which didn’t materialize as yet, capped price optimism.

Markets

Palm oil

Torn between lower seasonal productions and a subdued export outlook futures mostly moved up and down sideways just under 4000 MYR. Traditionally during Ramadan production drops below normal; this year Ramadan starts on March 10th and ends April 8th. This may push month ending stocks still lower and so the around 15% month on month decline in export volume from Malaysia in February had limited impact on prices. But palm oil strength, on lower production and lower stocks, was also capped by falling ‘soybean complex futures’ in Chicago and cheap sunflower seed oil.

Rerouting ships via the Cape, to avoid escalating military activity in the Red Sea, is expected, by shipping experts, to last till the end of the year and it causes higher freight rates as also global shipping capacity tightens due to longer sailing times. Depending on the size of the ship and a couple of other variables like multiple loading ports, freight which in December was about $85/t is now being “shouted” at anything between $120 and $165. The impact on palm oil prices CIF EU is becoming considerable.

EU's Deforestation-Free Regulation (EUDR) which came into force on June 29th last year is due to be implementedper 1/1/25. And the continuing phasing out of palm oil use in biofuel production is already being seen in declining EU palm oil imports. Both matters may result in a bit of bearishness for palm and a touch bullishness for sun and rape. Therefore, the Indonesian Palm Oil Producers Association (GAPKI) recently said both Indonesia and Malaysia asked EU to delay the implementation of the EUDR until 2026 because smallholders in Indonesia and Malaysia are not ready and it would threaten the viability of smallholder plantation businesses. To be continued…

New supply and demand estimates are expected in the coming days from analysts and key industry players at the Palm Oil Outlook Conference (POC) held in Kuala Lumpur this week. It could change the mood and indicate in what direction the fundamentals will eventually drive the market.

Soybean oil

Lower than anticipated yields from Brazil’s harvest, about 45% done and looking set to be one of the fastest ever, continued to reduce crop estimates. Forecasters estimate the Brazilian crop at around 150Mmt, a drop of 15Mmt compared to the start of the season. But with recent weather production and estimates have stabilized.

In Argentina, temperature swings have led to a reduction in harvest forecasts but weather conditions late January and in February were ideal. The Buenos Aires Grain Exchange estimates the Argentine crop at 52.5Mmt and this large harvest offsets losses suffered by Brazil.

The mood remains very positive. But the risk is that there is still a lot to buy and there is a wait-and-see attitude in the market… until the scramble or until a black swan appears?

In Chicago, soybeans futures hit their lowest level since late 2020 and it remains uncertain the market bottomed out. American soybean prices are under additional pressure on news of several Brazilian soybean shipments to the East Coast and the meager export sales reflect the poor demand seen for some time. Chinese bean demand is weak following the reduction in the pig herd reducing the demand for animal feed.

However, in the US, in the coming months and years, soybean demand is expected to stay strong for domestic crushing, largely driven by the growth in the use of soybean oil for the production of biofuels. And the US being a growing net importer of oils and fats should be supportive to global prices of all oils and fats.

Rapeseed oil

Rapeseed prices lost more than 5% since the beginning of the year, pushed down by a heavy oilseed complex in Chicago. Rapeseed prices are also back at levels of end 2020 but remain relatively supported, helped by a report saying Ukraine’s harvest of grains and oilseeds could fall up to 20% on reduced acreage, the fact that an Australian seed supply remains strongly hindered by shipping problems in the Red Sea and by anticipation of a lower EU 2024 harvest on an overall decline in rapeseed acreage.

The situation is not dramatic and there are ample supplies but all this will further tighten the EU seed supply. Global production forecasts including Canada and Australia still show some growth in production but it is dangerous to put money on such estimates. Downside potential is limited although rapeseed markets could still follow the pressure in soybean markets (or rebound with it). With spring just around the corner, the focus is now on EU crop conditions… until the crop is made!

As EU is phasing out the use of palm oil for biofuel production, and there is a proposal to phase out soybean oil as well, there could be a bigger pull on rapeseed oil. The only thing that could pressure rapeseed oil prices now are low sunflower seed oil prices, it seems…

Sunflower seed oil

There is little buying interest given the extreme bearishness of the soybean complex that is keeping a lid on most markets. Black Sea sunflower seed oil sellers are looking for new markets as Asian demand weakens due to high stocks and competition from South American oils. They also face Red Sea maritime trade flow disruptions which increase costs and complicate logistics.

With an abundant supply in the Black Sea region, sunflower seed oil is again the most competitive vegetable oil on the market. In Argentina it is offered at a discount to soybean oil. But the NW EU market holds a significant premium above Black Sea oil levels although crude non-winterized sun is cheaper than crude rape.

China reported high stocks of sun oil, while India increases imports from Argentina. Trade flows adapt fast to a new reality with India preferring Argentine sun oil due to lower costs, less risk and hassle associated with Black Sea and Red Sea routes and India also finds South American soybean oil a valid alternative.

Biofuels

As high prices always attract goods, a flow of “low carbon intensity feedstock” moved to the US and have somewhat pressured local prices of other feedstocks. Imports of Chinese UCO (used cooking oil) weighed on domestic and imported tallow from EU and Australia which in turn weighed on rapeseed, corn and soybean oil. But elsewhere this pull of feedstock out of the global market is price supportive. Global production of soybean oil is about 60Mmt of which the US, last year, used roughly 10% for biofuel production.