Your biweekly update on edible oils & fats by Aveno
Bi weekly dd April 15th 2024.A red flag for linseed oil and hope for olive oil.
While petroleum gained about 20% since the start of the year on Opec production cuts and on signs of a global economic recovery, now on the demand side, strong US inflation data dampened hopes for early rate cuts by the Federal Reserve, which could hurt the outlook for energy demand. Lower interest rates typically stimulate economic growth, which fuels energy demand. EU policymakers too left the policy interest rate unchanged for the time being.
Concerns also came from continued escalation of the war in Ukraine with attacks on petroleum refineries in Russia, taking out 20% of capacity, and Russian aggression on energy production in Ukraine.
We also saw a correction/drop in the stock market and as a result, traders and investors are liquidating their positions. This might spill over to the commodity sector. The question is if the money coming out of the stock market, will move to the Agri-sector and drive further short covering and push long positions?
Markets
Biofuels and food prices
Most growth in global consumption of edible oils and fats comes mainly from the continuous growth of global biofuel production. This year the projected production of oils & fats-based biofuels is 62.5Mmt according to “Oil World” while the total global production of oils & fats reaches 258Mmt. It is then perfectly understandable that, an ESG policy driven, biofuel production is a most important price driver.Global transportation fuel demand is expected to be strong in the summer as fuel consumption increases across the board and in all regions as summer and leisure travel picks up.
Some feedstocks are generally recognized as “low carbon intensity feedstock” and are therefore preferred. Used cooking oil (UCO) is one. But also corn oil, a byproduct from ethanol production, and animal fats are considered being “low carbon” versus palm oil and rapeseed or soybean oil. There is a fight between EU and US for these feedstocks which is driving up all prices. Before biodiesel there was no problem with these feedstocks, they can be used elsewhere such as in animal feed or in the oleo chemical industry. Usually, they are now being replaced by palm oil…
After seven months of decline, the FAO International Food Price Index rose again in March, mainly due to higher vegetable oil prices. The FAO vegetable oil price index rose 8% in March from February to 130.6 points and reached its highest level in a year, driven by rising prices of vegetable oils: palm oil prices continued to rise, supported by lower seasonal production in producing countries and good demand in Southeast Asia. Soybean oil prices benefited from sustained demand from the biofuel sector, especially in the US and Brazil. Similarly, sunflower and rapeseed oil prices recovered, reflecting rising global import demand. Firming petroleum prices also supported the edible oil price increase.
Linseed oil
In a Policy Response to the War in Ukraine, the European Commission published its "Proposal for a Council Regulation amending Annex I to Regulation (EEC) No 2658/87 on the tariff and statistical nomenclature and on the Common Customs Tariff" to increase tariffs on imports of cereals, oilseeds, and derived products from Russia and Belarus. These new tariffs are to rise to either €95/mt or to an ad valorem duty of 50%. In the case of linseed, it would mean a 50% price increase. The final decision is expected by Wednesday next week. EU can easily do without the minor imports of Russian rapeseed and sunflower oil seed. But for linseed there is no telling what may happen next. Availability and price of linseed oil may become a gigantic issue.In 2023, with a production of 1.1Mmt of linseed, Russia was the biggest producer (second is Kazakhstan with 650.000 mt) out of a global production of 2.87Mmt. And Russia accounted for about 60% of the linseed supply in EU. The global annual linseed oil production varies between 800.000 and 850.000 mt of which about 25% is produced in EU.
Although linseed oil production is small compared to e.g. rapeseed oil, there is a core demand for this specific oil in nonfood applications such as certain coatings but also as a source of the essential alpha-linolenic acid (an omega-3 fatty acid). An essential fatty acid is one that is necessary for the metabolism of humans and other animals, but which cannot be synthesized by the body itself and must thus be present in the diet as the body needs it for good health. Linseed oil is widely used in smaller quantities in human foodstuffs, fish feed and compound feed for terrestrial animals. This is an example of how sudden policy decisions influence our business and give meaning to the saying: hope for the best, prepare for the worst.
Palm oil
The upward movement of palm oil on the Kuala Lumpur Stock Exchange slowed in recent days and Malaysian palm oil futures retreated somewhat on Friday. Weaker soybean oil prices in Chicago dented sentiment, along with reports that palm oil imports into India, the main buyer, fell to a 10-month low for the month in March, as India replaced palm oil with cheaper sunflower seed oil. In China an uncertain economic recovery persisted with continued weak demand.But price weakness remained limited due to falling Malaysian inventories in March, which Reuters sees at an 8-month low, and reports of strong exports numbers. At the same time, petroleum prices rose due to growing tensions in the Middle East while below normal rainfall and above normal temperatures in palm producing areas could lead to lower-than-normal palm oil production in coming times.
The high prices, relative to other edible oils, are killing demand but it remains more likely that other oils will gain in price than palm would lose in order to close the price gap.
Soybean oil
Last week’s WASDE report (World Agricultural Supply and Demand Estimates) showed the US 23/24 carry over for soybeans moving, higher than trade expectations (from 315 to 340Mbu). This was mainly due to cuts in US soybean exports as the USDA left their estimate of the South American harvest unchanged. The USDA pegged Brazil's soy production at 155Mmt (compared to Brazil’s crop agency Conab’s 146.5) and Argentina's soy production at 50Mt. This difference in estimates is causing confusion in the market, as it indicates there are still uncertainties about the eventual crop size in South America. Last Friday, soybean prices recovered somewhat in Chicago, mainly in response to a downward revision of the Argentinian production forecasts of the Buenos Aires stock exchange which lowered its estimate by 1.5Mmt to 51Mmt.
After the April WASDE report and the Prospective Plantings report, the market will focus more on US plantings and weather forecasts. The harvest in Argentina took off and is about 10% done.
South American oil has been going to India and in the US, soybean oil is under price pressure due to the imports of low carbon intensity feedstocks for biofuels such as used cooking oil and animal fats.
Rapeseed oil
Rapeseed prices have become more volatile and firmer. The revival of the biofuel industry, good European demand for seed and meal and rising Hindi imports of vegetable oils continue to support the upward moves.The wet growing conditions in the EU are attracting increasing attention. Although the sunshine and higher temperatures of the past few days will have helped rapeseed to develop further positively on many plots. But a return of rain could negatively affect the EU production potential. There is a forecast for wind, showers and cool weather to prevail in many places at least until next weekend with temperatures often four to five degrees below seasonal values.
As EU biodiesel margins are expected to remain good and as we are nearing the end of season the old crop is expected to get tighter and command an increasing premium over new crop. The market is also concerned about dryness in Canada as their planting season begins. The market is on the defensive on anticipated tightness in coming months and perhaps coming season 2024/25. Nothing dramatic but just being careful. Also, rapeseed net-short positions have significantly been reduced in the last weeks!
Rapeseed oil grew increasingly less competitive in recent weeks, especially against sunflower oil. In EU biodiesel was supported by the firm gasoil prices and since the US is importing lots of used cooking oil and animal fats and since palm oil is not welcome for biodiesel production in EU (sustainability issues) there is no other alternative than to use more rapeseed oil for biodiesel production.
On the other hand, an explosion in the South of France last week forced the shutdown of a biodiesel plant for several months and there is talk of Argentinian SME (soy methyl ester = biodiesel) coming to EU, meaning somewhat less rapeseed oil demand from the biofuels sector.
Sunflower seed oil
Since it is cheap and available more people want sunflower seed oil. Often to replace palm oil. But higher demand means higher prices and less availability for everybody. India, China and North Africa countries have been keen buyers of this attractively priced oil.But as more buyers pop up stocks dwindle and so will the pressure on prices. Some start wondering if in the coming months we are not going to see a price premium over palm, soy and rape as we’ve been accustomed to see in previous times.
The July/Aug./Sept. period could become very technical as it is the time of transition from old to new crop and there is some doubt about the crop size next season. Nothing dramatic but just a bit less, especially in the wrong place, is enough to spark fireworks. Plantings and new crop developments should be watched carefully. The cure for low prices is often low prices as it does not encourage producers (e.g. farmers in Ukraine) to produce.
Olive oil
Widespread rains over Spain have dramatically improved production prospects for the next campaign. Also, Italy, so far, received more or less normal rainfall.Although the bulk of production is normally harvested between November and February, in EU, the olive harvest for oil production takes place between end October and April and as the Spanish harvest unwinds it appears the 2023/24 season is better than anticipated and better than the previous one, thanks to autumn rainfall.
High prices have chased away price-sensitive customers, domestically and abroad, to more affordable oils. The cure for high prices being high prices, this brought some relief and as production prospects for next season improve there is growing hope for much lower prices but there is not sufficient oil yet!
§§§
Please send your questions, comments and feedback to your regular AVENO contact.
§§§
Previous bi-weekly updates
There is some complexity to the business we daily operate in. To help understand the business of being an edible oil and fat producer we've launched a bi-weekly newsletter.
Every two weeks we will share an update about edible oils and fats.
You can find all previous updates here
Newsletter sign-up
Sign-up here to receive our Biweekly directly into your inbox.
Disclaimer
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.